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KOOPMAN^KESTI 


THE  LIBRARY 

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OF  CALIFORNIA 

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LIBRARY 

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Digitized  by  the  Internet  Archive 

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FUNDAMENTALS   OF 
ACCOUNTING 

Principles  and  Practice  of  Bookkeeping 

By 

S.  BERNARD  KOOPMAN,  M.S.,  M.C.S. 

Head  of  Department  of  Accounting  and  Law,  Theodore  Roosevelt 

High  School  of  the  City  of  New  York;   Member  of  Staff,  Accounting 

Department,  Columbia  University;   Certified  Public  Accountant 

And 

ROY  B.  KESTER,  Ph.D. 

Associate  Professor  of  Accounting,  Columbia  University  School  of 

Business;   Author  of  ''Accounting  Theory  and  Practice"  in  three 

volumes  ;  Certified  Public  Accountant 

IN  TWO  VOLUMES 
VOLUME  I 


Second  Printing 
NEW  YORK 

THE  RONALD  PRESS  COMPANY 

1922 

40061 


Copyright,  1 92 1,  by 
The  Ronald  Press  Company 


All  Rights  Reserved 


Bus.  Admin, 
Library 

HF 

5635 
K/3f 

PREFACE 

\i.l 

This  work  represents  an  endeavor  to  provide  suitable  text 
^  material  covering  the  basic  principles  of  accounting  and  book- 
keeping practice  in  convenient  form  for  instruction  by  the  class 
'  method.     It  is  the  result  of  years  of  experience  both  in  the  class- 
<Troom  and  in  business  and  its  methods  have  brought  uniformly 
1  '  good  results. 

The  material  here  presented  is  designed  as  a  one-year  course 
/p'for  students  beginning  the  subject.     Since  a  student's  use  of 
,4  the  general  principles  of  accounting  depends  on  his  ability  to 
»  apply  them  intelligently,  his  basic  training  is  of  vital  impor- 
tance.   His  first  steps  must  be  taken  with  care.    In  this  treatise 
the  correct  point  of  view  is  held  constantly  before  him,  the 

J' subject  being  developed  logically  and  easily  in  a  well-graded 
course.     Ample  drill  material  is  provided  at  the  end  of  each 
chapter  in  the  form  of  carefully  graded  problems  to  fix  the 
principles  treated.    Not  all  the  problems  in  every  chapter  may 
J  be  required  for  every  class.     It  is  suggested  that  the  teacher 
:|  proceed  with  the  new  chapter  as  soon  as  the  pupils  can  apply 
(L-  the  principles  discussed. 

A  second  book  is  in  course  of  preparation  and  will  be  ready 
within  a  year.  The  two  books  will  present  the  materials  usually 
covered  in  high  school  courses. 

This  text  had  its  inception  in  the  course,  Methods  of  Teach- 
ing Bookkeeping  and  Accounting,  given  since  1916  to  public  and 
private  secondary  school  teachers  in  the  summer  session  at 
Columbia  University.  It  forms  the  basis  for  the  work  in  the 
Theodore  Roosevelt  High  School  where  the  members  of  the 
teaching  staff  have  tested  it  out  successfully  and  have  secured 
excellent  results. 


m 


IV  PREFACE 

The  authors  desire  to  express  their  appreciation  of  the  assist- 
ance rendered  by  Miss  Edith  Fremdling  and  Mr.  John  Jaffe  in 
the  preparation  of  part  of  the  practice  material.  They  are  under 
obligation,  also,  to  the  many  business  houses  and  banks  that 
extended  every  courtesy  in  the  use  of  business  forms  in  this  text 

S.  B.  Koopman 
R.  B.  Kester 
New  York  City, 
October  15,  1921. 


INTRODUCTORY 

In  a  current  survey  of  commercial  education  in  the  public 
high  schools  of  the  United  States  it  is  stated  that  the  commercial 
course  is  a  "technical  training  course  giving  instruction  in 
mechanical  routing";  that  it  is  an  "inheritance  from  the  busi- 
ness college";  that  it  is  an  "attachment,  not  a  coalescence  to 
the  old  high  school";  and  finally  that  it  is  "utilitarian,  not 
social"  in  its  aims  and  ideals.  Only  within  a  very  few  years 
has  there  been  even  a  partial  appreciation  of  the  real  status  of 
commercial  education  in  the  public  high  schools.  This  indict- 
ment applies  in  full  to  bookkeeping,  which  has  always  formed 
the  backbone  of  the  commercial  course.  The  teaching  of  book- 
keeping has  been  seriously  handicapped  not  only  by  the  difficulty 
of  securing  professionally  trained  teachers  but  by  the  lack  of  text 
material  organized  to  develop  fundamental  principles  through 
reasoning. 

A  recent  syllabus  in  bookkeeping  gives  the  aims  of  the  course 
as  four,  viz. : 

i.  To  develop  the  fundamentals  of  accounting. 

2.  To  teach  the  art  of  bookkeeping. 

3.  To  give  instruction  concerning  business  practice. 

4.  To  develop  the  mind,  particularly  the  analytical  and 

imaginative  abilities. 

The  authors  of  this  text  are  in  agreement  with  these  aims', 
but  prefer  to  state  the  purpose  of  bookkeeping  instruction  as  the 
development  of  mental  capacity  by  means  of,  and  in  relation  to, 
the  first  three  aims  above  tabulated.  So-called  education  that 
does  not  stimulate  the  student  to  the  free  use  of  his  mental 
equipment  is  spurious,  and  its  inclusion  is  a  criminal  waste  to  be 
condoned  only  on  the  ground  of  ignorance,  never  on  the  ground 
of  expediency. 


vi  INTRODUCTORY 

Heretofore  bookkeeping  has  been  studied  primarily  to  fit  the 
student  to  record  information  which  the  business  man  has  found 
useful  in  conducting  his  business,  the  bookkeeper  being  a  mere 
recorder  or  mechanical  operator  who  acquires  skill  and  accuracy 
by  recording,  day  after  day,  information  of  the  same  type.  Small 
wonder,  then,  that  bookkeeping  has  been  called  a  "  blind  alley 
job,"  that  it  has  been  referred  to  as  monotonous,  deadening, 
mechanical  work  with  but  slight  chances  of  promotion!  Small 
wonder,  then,  that  it  is  said  to  have  little  educational  value! 

The  trouble  is  not  in  the  subject  matter,  but  in  the  manner  of 
its  presentation.  The  mechanical  side  has  been  emphasized  as 
the  great  aim  of  the  subject.  Accordingly,  those  whose  minds 
ran  to  order,  neatness,  carefulness,  and  detail  were  quite  success- 
ful through  following  the  rules  provided  by  some  mechanical 
recorder.  But  the  successful  bookkeeper  usually  remained  a 
bookkeeper  all  his  life,  while  a  person  who  studied  bookkeeping 
but  did  not  practice  it  obtained  practically  no  benefit  from 
his  study  except  a  knowledge  of  business  customs  picked  up 
incidentally. 

A  great  deal  of  attention  has  been  given  to  penmanship  and 
arithmetic  as  aids  in  correctly  gathering  business  data.  They, 
however,  only  obscure  the  real  educational  value  of  bookkeeping 
when  taught  during  the  bookkeeping  recitation  and  can  be  taught 
much  more  effectively  as  separate  subjects.  One  never  thinks 
of  placing  any  emphasis  on  penmanship  in  teaching  story- writing 
— the  means  of  recording  is  always  secondary.  Just  as  we  expect 
the  student  to  write  a  legible  hand,  so  we  expect  him  to  know  ele- 
mentary arithmetic,  including  simple  percentage  and  interest 
calculations. 

The  value  of  bookkeeping  training  must  be  judged  from  two 
standpoints — educational  and  vocational.  It  is  doubtful  whether 
any  subject  can  be  allowed  a  place  in  the  school  curriculum 
solely  on  a  vocational  basis.  It  must  also  possess  educational 
value  in  large  measure.  If  properly  presented,  bookkeeping  has 
a  distinct  educational  value,  and  will  develop  the  student's 


INTRODUCTORY  Vll 

reasoning  powers  in  regard  to  business  affairs,  because  book- 
keeping is  applied  economics.  It  is  vocational  only  because  of 
its  subject  matter.  It  is  intensely  practical,  but  that,  instead  of 
detracting  from  its  educational  value,  should  largely  increase  it 
because  of  the  element  of  interest  involved.  This  interest  is  too 
often  killed  by  the  mechanical  methods  used  in  teaching  the  sub- 
ject. Not  the  recording,  but  the  effect  of  a  business  transaction 
on  the  financial  affairs  of  a  business  should  be  emphasized.  The 
record-making,  while  important,  is  only  incidental.  The  real 
educational  value  of  bookkeeping  comes  from  the  development 
of  the  student's  ability  to  form  correct  judgments  as  to  the  finan- 
cial effect  of  the  operations  of  a  business  unit.  This,  the  manage- 
ment viewpoint,  is  the  important  thing  for  the  student's  future 
growth.  The  student  no  longer  looks  to  the  collecting  of  informa- 
tion as  an  end  in  itself,  but  only  a$,  a  means  of  directing  the 
operation  of  the  business  more  effectively.  His  viewpoint  is 
larger;  it  is  that  of  the  manager  or  executive  instead  of  the 
recorder  or  bookkeeper.  . 

What,  then,  is  the  best  method  of  presenting  the  subject  to 
secure  the  desired  results?  Psychologists  maintain  that  a  per- 
son works  more  intelligently  and  with  greater  interest  if  he  knows 
the  goal  toward  which  he  is  headed,  i.  e.,  the  mind  forms  a  better 
concept  of  the  new  thing  by  studying  it  as  a  unit  first,  then  sepa- 
rating it  into  its  parts,  studying  each  part  in  its  relation  to  the 
whole,  and  finally  building  up  the  whole  from  its  parts.  This 
method  proceeds  from  the  general  to  the  particular  and  then 
from  the  particular  to  the  general.  By  this  method  a  general 
rule  is  deduced  which  the  student  uses  in  determining  the 
relation  of  the  parts  to  the  whole. 

Not  the  mechanical  or  the  logical  order,  but  the  pyschological 
order  of  presenting  the  subject  should  be  followed.  The  ma- 
terial is  arranged  in  such  order  that  the  mind  can  grasp  the  new 
concept  most  easily  and  interpret  (apperceive)  it  most  completely 
in  terms  of  related  concepts  already  in  the  mind.  In  teaching, 
old  related  material  should  be  recalled  before  the  new  matter  is 


Vill  INTRODUCTORY 

presented.  It  is  generally  understood  that  only  one  new  thing 
should  be  presented  at  a  time.  The  new  thing  should  then  be 
associated  as  closely  as  possible  with  the  old  related  material, 
after  which  should  follow  a  generalization  or  summary  for  the 
purpose  of  placing  the  particular  item  in  a  general  class.  This 
generalization  or  summary  often  takes  the  form  of  a  rule  or 
principle.  Finally  the  new  concept  should  be  fixed  in  mind  by 
means  of  application  or  drill. 

The  Equation  Method  used  in  this  text  is  an  attempt  to 
present  the  fundamentals  of  accounting  in  psychological  order. 
This  method  emphasizes  the  organization  and  management 
viewpoint,  stressing  the  effect  of  business  transactions  rather 
than  aiming  at  mechanical  dexterity  in  recording  them. 

The  personal  possessions  and  debts  of  the  student  are  taken 
as  the  foundation  upon  which  to  lay  proper  concepts  of  things 
owned  (assets)  and  things  owed  (liabilities).  The  student  is 
personally  interested  in  these,  and  therefore  grasps  their  new 
relation  more  easily  than  if  the  approach  were  in  connection  with 
things  of  others.  When  the  student  once  knows  how  to  deter- 
mine his  own  financial  condition,  he  can  easily  apply  the  same 
principles  to  the  financial  condition  of  business  enterprises.  Ac- 
cording to  this  plan,  the  small  business  of  an  individual  owner  is 
considered  and  his  proprietorship  interest  is  measured  by  means 
of  the  basic  equation:  Assets  minus  liabilities  equals  capital.  A 
statement  of  his  financial  condition  as  of  a  later  date  is  then 
prepared. 

A  comparison  of  his  proprietorship  as  of  the  two  dates  will 
show  that  a  change  has  occurred.  Realization  that  the  causes  of 
such  changes  are  not  apparent  leads  naturally  to  inquiry  for 
other  data  that  will  give  causes.  To  obtain  this  additional  in- 
formation comprising  the  income  and  expenses  of  business  opera- 
tion, records  must  be  kept.  The  most  complete  and  satisfactory 
record  consists  of  double-entry  books  of  account,  which  contain 
all  changes  in  assets  and  liabilities  and  so  provide  the  desired  in- 
formation concerning  income  and  expenses.     The  process  thus 


INTRODUCTORY  ix 

naturally  works  back  to  the  ledger  which  furnishes  this  classified 
information,  after  which  the  journals  or  books  of  original  entry 
are  introduced  as  devices  for  collecting  the  desired  information. 
Thus  at  every  step  the  goal  is  in  sight  and  the  relation  of  the  new 
devices  introduced  to  the  fundamental  equation  is  easily  dis- 
cernible. This  is  accomplished  through  the  constant  insistence 
that  each  transaction  be  explained  in  terms  of  assets,  liabilities, 
and  proprietorship.  The  student  thus  obtains  a  comprehensive 
knowledge  of  the  accounting  procedures  required  for  a  small, 
simple  business  unit  during  an  accounting  period.  Since  all 
succeeding  work  consists  merely  of  more  complex  applications 
of  the  same  principle,  the  student  can  easily  understand  the  new 
work.  There  is  continuous  interest  because  new  items — classes 
of  assets  and  liabilities  and  subdivisions  of  proprietorship — are 
being  added  one  at  a  time.  The  student's  attention  is  every- 
where directed  toward  the  economic  rather  than  the  mechanical 
aspect  of  the  subject. 

Depending  on  the  amount  of  study  devoted  to  the  subject 
the  student  will  acquire  such  a  knowledge  of  business  data  and 
the  ability  to  record  and  interpret  them  as  will  enable  him  to  act 
as  a  bookkeeper  or  office  assistant.  Since  the  great  majority  of 
those  entering  business,  however,  either  never  become  book- 
keepers or  do  not  continue  as  bookkeepers,  the  emphasis  in  teach- 
ing should  be  placed  on  the  general  grasp  of  financial  problems, 
rather  than  upon  mechanical  recording.  Principles  must,  how- 
ever, always  be  given  ample  application  before  the  process  of 
teaching  is  complete.  Some  practical  applications  of  accounting 
can  be  taught  without  teaching  accounting,  but  the  student 
secures  only  a  one-sided  view  and  is  therefore  likely  to  make 
wrong  judgments.  He  does  not  know  how  the  operations  which 
have  taken  place  in  the  various  departments  of  the  business 
have  produced  the  figures  found  in  the  different  financial  state- 
ments. Therefore  the  subject  cannot  be  taught  effectively  by 
eUminating  all  mechanical  recording. 

Principles  without  practice  are  vain.     Practice  based  on 


x  INTRODUCTORY 

nile-of- thumb  and  not  on  logical  principles  can  never  be  sure  of 
itself.  The  authors  have,  therefore,  attempted  to  develop  a 
textbook  for  the  beginner  based  on  a  proper  balance  between 
these  two  essential  elements.  To  supply  a  text  providing  in- 
struction from  the  standpoint  of  a  class  recitation  rather  than  a 
mere  laboratory  exercise  has  been  an  aim  kept  constantly  in  view. 
The  laboratory  method  is  a  holdover  from  the  time  of  the  ap- 
prentice system  when  one  could  learn  only  by  doing.  It  is 
narrowing,  wasteful,  and  non-educational,  and  can  be  defended 
only  where  the  instruction  material  has  not  been  sufficiently 
organized  for  proper  presentation  in  the  classroom.  The  method 
of  the  class  recitation  comprising  a  simple  and  psychological 
development  and  discussion  of  basic  principles  together  with  a 
careful  application  of  them  should  be  used  in  teaching  bookkeep- 
ing just  as  in  teaching  mathematics,  science,  or  language.  Plenty 
of  practice  problems  should  be  required  of  the  student  to  make 
sure  of  his  grasp  of  principles.  The  student  is  therefore  given 
home  or  study  assignments  both  of  text  matter  and  of  practice 
problems. 

The  authors  believe  that  teachers  of  bookkeeping  all  over  the 
country  are  awakening  to  the  needs  of  the  situation  and  are 
equipping  themselves  for  better  service  by  home  and  continuation 
study  in  schools  of  commerce. 


*%/ 


CONTENTS 


Chapter  Page 

I  Why  Study  Accounting  ? i 

II  Business,  Accounting,  and  Proprietorship      .      .  1 1 

III  The  Accounting  Equation 22 

IV  Classification  of  Assets  and  Liabilities      ...  27 
V  Valuation  of  Assets  and  Liabilities      ....  39 

VI  Causes  of  Changes  in  Capital 54 

VII  Comparative  Statements  of  Financial  Condition  69 

VIII  Development  of  the  Equation 80 

IX  Expansion  by  Substitution 94 

X  Expansion  by  Substitution  (Continued)    .      .      .  107 
XI  Further  Applications  of  Expansion  by  Substitu- 
tion— The  Ledger  and  the  Trial  Balance      .      .  142 
XII  The  Financial  Statements — Closing  the  Ledger  161 

XIII  The  Journal 191 

XIV  Ledger  Closing  by  Means  of  the  Journal .      .      .  211 
XV  Accruals 228 

XVI  Interest 242 

XVII  Discounts — Trade  and  Cash 273 

XVIII  Labor-Saving  Methods — The  Purchase  Journal  .  291 

XIX  The  Sales  Journal 308 

XX  The  Cash  Receipts  Journal 321 

XXI  The  Cash  Disbursements  Journal        .      .      .      -331 

XXII  The  Cash  Book 341 

XXIII  The  General  Journal 359 

XXIV  Business  Papers — The  Goods  Invoice  .      .      .      -373 
XXV  Negotiable  Instruments — Promissory  Notes  .      .  399 

XXVI  Banks  and  Their  Functions 423 

XXVII  Bills  of  Exchange— Drafts 457 

xi 


FORMS 


Form  Page 

1.  (a)   Graph  of  Comparative  Financial  Condition 72 

(b)   Comparative  Graph  of  Total  Assets,  Liabilities,  and  Capital  73 

2.  Standard  Form  of  Ledger  Account 148 

3.  (a)   Trial  Balance  of  Totals 153 

(b)  Trial  Balance  of  Differences 1 53 

4.  (a)   Balance  Sheet — Report  Form 165 

(b)  Balance  Sheet — Account  Form 166 

5.  Statement  of  Profit  and  Loss 167 

6.  (a)   Standard  Form  of  Journal  with   Date  Above  the  Debit  and 

Credit  Position 195 

(b)  Standard  Form  of  Journal  with  Date  Column  to  Left  .  196 

(c)  Standard  Form  of  Journal  with  Folio  Column  to  Left  of  the 

Debit  and  Credit  Position 196 

7.  (a)   Purchase  Journal — Old  Form 299 

(b)  Purchase  Journal — New  Form 301 

8.  Sales  Journal 314 

9.  Cash  Receipts  Journal 324 

10.  Cash  Disbursements  Journal 334 

11.  Cash  Book 346-349 

12.  Simple  Form  of  Invoice 375 

13.  Various  Styles  of  Invoices 378 

14.  Receipted  Invoice 381 

15.  Separate  Receipt  Form 382 

16.  Express  Receipt 385 

17.  Straight  Bill  of  Lading 387 

18.  Credit  Memorandum 388 

19.  Statement  of  Account 389 

20.  (a)   Promissory  Note  without  Interest 402 

(b)  Promissory  Note  with  Interest 402 

21.  (a)   Forms  of  Unqualified  Indorsement 405 

(b)  Forms  of  Qualified  Indorsement 405 

(c)  Forms  of  Restrictive  Indorsement 405,  406 

22.  Note  Showing  Indorsements 407 

23.  Note  Receivable 410 

24.  Note  Payable 411 

25.  Certificate  of  Protest 414 

26.  Notice  of  Dishonor 415 

27.  Deposit  Ticket 430 

28.  (a)  Check  Payable  to  "  Cash " 432 

(b)  Draft  Form  of  Check 433 

(c)  Check  for  Less  than  One  Dollar 433 

29.  Pass-Book  Balanced 436 

30.  Bank  Statement  of  Account 437 

3 1 .  Form  of  Check  Book  Showing  Reconciliation 440 

32.  Certified  Check 443 

xii 


FORMS  xni 

Form  Page 

33.  Cashier's  Check 444 

34.  Certificate  of  Deposit 444 

35.  (a)   Sight  Draft .      .  461 

(b)  Time-after-Sight  Draft— Accepted 461 

(c)  Time-after- Date  Draft — Accepted 462 

36    Collection  Draft 465 

37.  Order  Bill  of  Lading     ...            ...            .      .  467 

38.  (a)   Trade  Acceptance  Approved  by  Federal  Reserve  Board  475 
(b)  Trade  Acceptance  Approved  by  American  Acceptance  Council  476 

39.  Bank  Draft        .      .            ...            .                        ...  479 

40    Post-Office  Money-Order         479 

41.  Express  Money-Order 479 


Fundamentals  of  Accounting 


chapter  I 

WHY  STUDY  ACCOUNTING? 

Education  as  a  Preparation  for  Life. — In  our  country,  where 
every  boy  and  girl  is  familiar  with  the  system  of  public  education, 
it  may  seem  hardly  necessary  to  state  that  the  purpose  of  educa- 
tion is  to  prepare  one  for  his  life's  work.  From  the  beginning  of 
our  country's  existence  one  of  her  chief  aims  has  been  the  educa- 
tion of  her  youth.  Almost  all  states  have  compulsory  education 
laws  in  accordance  with  which  a  boy  or  girl  must  continue  in 
school  until  he  has  attained  a  certain  age  or  a  certain  grade  in  his 
school  work.  When  one  compares  men  in  various  walks  of  life, 
one  cannot  help  noting  that  a  very  large  percentage  of  the  success- 
ful men  in  a  community  are  educated  men. 

Of  the  boys  and  girls  who  finish  the  eighth  grade,  not  more 
than  20%  finish  the  high  school  course;  and  of  those  who  finish 
high  school  only  a  very  small  percentage  finish  a  course  in  college. 
While  we  have  notable  examples  of  men  deemed  successful  in  life 
who  have  not  had  a  college  education,  yet  it  is  recognized  that  in 
our  present-day  civilization  an  educated  man  has  a  much  better 
chance  of  success  than  a  man  without  education. 

As  to  what  constitutes  a  successful  life,  opinion  of  course 
differs.  One  man  may  set  for  himself  the  acquiring  of  a  large 
fortune.  If  he  falls  short  of  his  goal,  he  will  not  consider  himself 
successful.  Another  man  may  set  for  himself  perfection  in  music 
or  painting.  Unless  he  attains  the  standard  of  perfection  set  for 
himself,  he  will  not  consider  himself  successful,  although  by 
others  he  may  be  proclaimed  an  artist.  Success  is  often  measured 
in  terms  of  happiness.    Ethical  values  are  often  considered  the 


2  FUNDAMENTALS  OF  ACCOUNTING 

measure  of  success.  It  is  frequently  said  that  a  man  who  has 
given  the  most  of  himself  to  the  community,  that  is,  to  the 
civilization  in  which  he  lives,  gets  the  most  of  real  satisfaction 
out  of  life.  Certainly,  when  measured  by  this  standard  of  success, 
education  is  a  necessary  preparation  for  a  successful  life. 

In  its  broader  sense  education  should  not  be  limited  to  the 
training  acquired  in  the  schoolroom,  but  should  be  looked  upon 
as  a  continuous  process.  The  habits  of  thought  and  the  training 
that  one  acquires  in  the  classroom  should  be  carried  into  every- 
thing done  after  the  formal  school  life  is  over.  When  so  viewed 
everything  a  man  does  may  be  used  for  educative  purposes. 
Unless  education  is  something  more  than  a  cloak  to  be  put  on  or 
laid  aside  at  will,  there  is  little  of  permanent  value  in  it. 

The  fundamental  purpose  in  education  is  to  teach  the  learner 
how  to  use  his  mental  abilities  in  making  the  most  of  the  life  and 
civilization  in  which  his  lot  is  cast.  Development  of  any  sort, 
be  it  of  muscle  or  of  mind,  can  come  only  from  use.  The  start 
which  one  acquires  in  school  should  be  looked  upon  simply  as  a 
start.  Habits  are  formed  and  methods  of  using  one's  abilities 
are  acquired  which,  unless  developed  through  daily  use,  will 
soon  become  of  no  value.  What  particular  place  one  may  fill  in 
the  life  of  one's  community  is  always  a  most  important  question 
and  one  which  faces  every  boy  and  girl  of  high  school  age.  It  is 
proposed  in  this  first  chapter  to  point  out  some  of  the  kinds  of 
work  which  may  prove  attractive  to  high  school  students. 

•  Vocations  as  Forms  of  Service. — In  the  earlier  history  of  the 
human  race  it  is  supposed  that  every  man,  or  at  least  every  family, 
was  more  or  less  self-supporting  and  self-sufficient.  Each  family 
made  all  of  the  things  necessary  to  secure  the  best  kind  of  a  living 
possible  in  those  days.  Building  a  house  for  shelter,  making 
clothing,  getting  food — all  these  were  done  by  each  family  for 
itself.  As  civilization  advanced  and  men  became  more  dependent 
on  one  another,  divisions  of  labor  developed.  In  this  way  one 
group  of  men  did  certain  things  for  which  they  were  best  fitted, 


WHY  STUDY  ACCOUNTING?  3 

and  furnished  certain  necessaries  to  their  fellow-men,  who  in  turn 
did  other  things  for  which  they  were  best  fitted,  and  so  furnished 
some  of  the  other  necessaries  of  life.  Thus  the  many  duties  and 
tasks  which  have  to  be  performed  to  make  living  satisfactory  were 
divided  and  men  began  to  specialize,  that  is,  they  limited  them- 
selves to  one  kind  of  work  instead  of  trying  to  do  all  kinds .  In  this 
sense,  then,  a  man's  work  or  his  vocation  may  be  said  to  consist 
in  or  arise  from  the  services  which  society  has  to  have  performed. 

Choosing  a  Vocation  Early.— Because  of  the  way  in  which 
society  is  constituted  at  the  present  time,  boys  and  girls  growing 
up  into  manhood  and  womanhood  must  prepare  to  take  their 
places  in  the  various  vocations  of  life.  Which  vocation  will  be 
best  for  each  is  the  greatest  problem  that  faces  any  boy  or  girl. 
It  is,  indeed,  a  very  unhappy  situation  to  find  yourself,  like  a 
square  peg  in  a  round  hole,  unfitted  for  the  task  confronting  you. 
Happy  is  the  youth  who  can  settle  early  in  life  the  position  or 
vocation  he  desires  to  enter  and  can  then  train  himself  definitely 
with  that  end  in  view.  There  is  always  a  waste  of  effort  and  'dss 
of  time  in  changing  about  from  one  thing  to  another  until  one  at 
last  finds  the  particular  vocation  for  which  he  thinks  himself 
best  fitted.  We  shall  try  now  to  give  the  student  an  idea  of  the 
main  vocations  or  kinds  of  service  which  life  today  requires  to  be 
performed. 

Classification  of  Vocations. — Vocations  may  be  broadly 
divided  into  two  groups,  public  and  private. 

I  Public  Group 

i.  Government  Service.     Under  this  head  are  found  three  major  kinds 
of  services: 

(a)  Legislative,  which  concerns  itself  with  law-making.  . 

(b)  Judicial,  which  concerns  itself  with  the  interpretation  and 

meaning  of  the  laws. 

(c)  Executive,  which  concerns  itself  with  the  carrying  out  of  the 

laws.    Under  each  of  these  branches  of  government  service 
there  are  many  bureaus  and  departments.    The  Post-Office 


4  FUNDAMENTALS  OF  ACCOUNTING 

Department,  the  Farm  Bureau,  the  Interstate  Commerce 
Commission  with  its  man}'  activities,  the  Federal  Trade 
Commission,  and  the  Consular  Service  are  examples  of  the 
many  different  kinds  of  governmental  service. 

2.  Religious  Service.     This  includes  services  which  the  church  and 

allied  societies  perform. 

3.  Educational  Service.     This  includes  both  public  and  private  schools 

and  all  formal  educational  activities  wherever  found,  such  as 
employees'  training  classes  in  banks  and  other  corporations,  gov- 
ernment bureaus,  etc. 
II  Private  Group 

1.  The  Professions,  under  which  are  included  the  vocations  of  medicine, 

teaching,    law,    accounting,    engineering,    dentistry,  journalism, 
chemistry,  etc. 

2.  The  Non-Professional  Vocations,  which  comprise  all  of  those  gen- 

erally spoken  of  as  business. 

It  is  not  possible  to  indicate  at  this  time  the  many  positions 
which  are  found  under  each  one  of  these  classes  or  subclasses. 
Every  boy  and  girl  knows  what  a  good  many  of  these  are,  and 
many  a  student  is  training  specifically  for  some  one  of  them. 

How  important  the  commercial  occupations  are,  as  dis- 
tinguished from  industrial  or  manufacturing  occupations,  is  seen 
from  the  following  quotation  from  Bulletin  No.  34,  issued  by  the 
Federal  Board  for  Vocational  Education: 

More  young  people  between  the  ages  of  14  and  16  years  are 
employed  in  commercial  occupations  than  in  industrial  pursuits. 
A  recent  survey  of  such  workers  in  an  eastern  city  of  about 
300,000  population  revealed  the  fact  that  out  of  2,750  boys  and 
girls  included,  only  300  were  in  occupations  which,  by  the  widest 
stretch  of  the  imagination,  could  be  classified  as  industrial.  The 
remaining  2,450  were  recorded  as  commercial  employees. 

With  a  knowledge  of  the  whole  field  of  vocations,  it  should  be 
possible  to  choose  one  which  seems  most  attractive  and  for  which 
the  student  thinks  himself  best  fitted. 

Private  Ownership  of  Property. — In  whatever  vocation  one's 
lot  may  be  cast  it  will  always  be  found  that  the  private  ownership 


WHY  STUDY  ACCOUNTING?  5 

of  property  is  an  unquestioned  right  of  the  individual.  Proprietor- 
ship, that  is,  the  ownership  of  property,  is  looked  upon  as  a  very 
desirable  thing.  Men  strive  for  property,  not  so  much  for  its 
own  sake,  but  because  of  the  many  satisfactions  which  the 
ownership  of  property  gives  to  them.  In  the  ownership  of  prop- 
erty it  is  necessary  to  keep  a  record  of  the  kinds  and  amounts  of 
property  owned.  In  order  to  do  this  it  is  necessary  to  place  a 
money  value  on  them.  Thus  the  amount  of  one's  property  is 
more  easily  kept  track  of.  All  businesses  are  concerned  with  the 
ownership  of  property. 

In  the  acquisition  and  control  of  property,  proper  manage- 
ment is  necessary.  The  ways  in  which  businesses  are  organized 
into  single  proprietorships,  partnerships,  and  corporations,  and 
also  into  departments  and  subdepartments  for  the  more  efficient 
handling  of  the  work  to  be  done  must  be  studied  carefully  by  the 
business  man  if  he  expects  to  bring  his  undertaking  to  a  successful 
issue.  In  every  enterprise  provision  must  be  made  for  gathering 
information  about  the  business,  for  analyzing  and  organizing  it, 
and  finally  for  using  it  in  the  administration  of  the  business. 
Unless  a  business  man  has  reliable  information  about  the  many 
details  of  his  .business,  he  cannot  hope  to  manage  it  efficiently. 

Place  of  Accounting  in  Business. — It  is  in  this  connection 
that  accounting  has  a  place  in  business.  It  provides  a  simple 
method  for  getting  information  and  for  analyzing  and  organizing 
it.  The  information  furnished  by  the  accounting  records  shows 
the  relation  of  each  department  and  of  each  activity  to  the  busi- 
ness as  a  whole  and  to  each  of  the  other  departments.  The  ac- 
countant by  watching  his  records  can  almost  see  the  business 
grow  under  his  fingertips  as  he  makes  the  record.  If  he  is  wide- 
awake and  really  understands  what  he  is  doing,  he  can  gain  a 
complete  understanding  of  the  way  in  which  the  business  is  or- 
ganized, the  relations  of  one  department  to  another,  and  can 
gain  a  concept  of  the  problems  of  business  management.  Ac- 
counting may  be  said  to  make  a  record  of  the  pulse  of  the  business 


6  FUNDAMENTALS  OF  ACCOUNTING 

and,  therefore,  to  indicate  its  condition  as  to  health  or  sickness. 
It  is  apparent,  therefore,  how  important  the  accounting  records 
are  in  any  business. 

Educational  Value  of  Accounting. — It  has  been  said  that 
commercial  subjects  have  little  real  educational  value,  that  they 
are  more  in  the  nature  of  manual  training  subjects  than  of  those 
which  give  mental  discipline.  This  early  impression  of  the  value 
of  commercial  training  has  been  largely  discarded.  It  is  now 
fully  realized  that  the  problems  which  arise  in  business  require 
for  their  solution  as  high  a  type  of  mental  discipline  and  training 
as  the  problems  met  in  any  other  activity.  It  follows,  therefore, 
that  the  study  of  business  subjects  and  business  problems  will 
give  as  good  a  mental  discipline  as  will  the  "hypothetical"  prob- 
lems of  the  classical  education. 

Reasoning  power  is  developed  through  practice  in  the  forma- 
tion of  correct  judgments  in  business  affairs  and  through  analysis 
of  a  given  set  of  facts  to  show  the  relation  of  one  part  to  another. 
All  phases  of  mental  discipline  are  found  in  the  study  of  business 
subjects  and  to  a  marked  degree  in  the  study  of  accounting. 
There  is,  however,  always  the  danger  that  the  mechanical  opera- 
tions involved  in  making  the  record  in  the  books  of  account  may 
be  emphasized  rather  than  the  fundamental  principles  in  accor- 
dance with  which  the  records  must  be  made.  If  the  underlying 
principles  are  first  studied  and  then  put  into  practice  by  means  of 
drill  work,  the  subject  of  accounting  can  be  made  to  rank  high 
as  to  educational  value.  Principles  for  their  own  sake  have 
little  value;  but  when  put  to  use  in  solving  the  practical  prob- 
lems of  every-day  business,  principles  have  a  large  measure  of 
value. 

Vocational  Value  of  Accounting. — Accounting  has  come  to 
be  one  of  the.  best  of  the  younger  professions.  There  are  two 
divisions,  one  devoting  itself  to  public,  the  other  to  private 
practice. 


WHY  STUDY  ACCOUNTING?  7 

The  public  accountant  is  called  in  for  consultation  and  advice 
by  men  in  all  kinds  of  business.  He  has  an  office  and  a  staff  of 
assistants  just  as  has  the  lawyer.  Accounting  firms  are  com- 
posed usually  of  partners  who  are  the  owners  of  the  business. 
Under  them  are  supervising  seniors  who  supervise  the  work  being 
done  for  the  various  clients.  The  supervising  senior,  who  may  be 
in  charge  of  a  number  of  jobs  or  assignments  at  the  same  time, 
has  under  his  direction  the  senior  accountants,  who  are  each 
actively  in  charge  of  an  individual  assignment.  The  senior  will 
have  as  his  assistants  men  known  as  "  semiseniors  "  and  "juniors." 
A  young  man  entering  the  accounting  profession  may  expect  to 
pass  through  the  varying  grades  of  accountants,  junior,  semi- 
senior,  senior,  and  supervising  senior,  and  may  look  forward 
after  a  thorough  training  in  the  practical  phases  of  the  work  to 
being  the  proprietor  of  his  own  accounting  business. 

The  private  accountant  gives  his  entire  time  to  one  business. 
There  are  many  grades  of  bookkeepers  and  accountants  in  most 
businesses.  The  larger  the  business,  the  greater  the  subdivision 
of  duties,  some  requiring  very  little  knowledge  of  accounting  for 
the  proper  performance  of  the  task.  It  is  this  sort  of  position, 
known  as  a  "blind-alley  job,"  into  which  the  person  who  knows 
only  the  mechanical  side  of  bookkeeping  usually  falls.  Only  by 
means  of  a  mastery  of  the  fundamental  principles  of  accounting 
and  through  a  knowledge  of  business  practice  in  general  can  an 
employee  hope  to  avoid  this  kind  of  job,  or  work  out  of  it  if  he 
finds  himself  in  it.  The  higher  positions— head  bookkeeper,  head 
accountant,  auditor,  manager,  comptroller,  secretary,  or  treasurer 
— all  require  a  broad  knowledge  not  only  of  accounting  but  also 
of  the  allied  subjects,  economics,  business  organization,  banking, 
and  law. 

Value  of  Accounting  to  the  Business  Man. — For  the  man  who 
does  not  expect  to  follow  accounting  professionally  a  fundamental 
knowledge  of  the  subject  is  extremely  valuable  in  the  conduct  of 
his  business.    As  stated  before,  business  cannot  be  conducted 


8  FUNDAMENTALS  OF  ACCOUNTING 

today  on  any  other  basis  than  a  complete  knowledge  of  all  of  its 
activities.  This  is  furnished  largely  by  the  accounting  records. 
Unless,  therefore,  the  business  man  knows  how  the  accounts  can 
be  made  to  give  this  information,  he  is  greatly  handicapped  in 
knowing  what  to  expect  from  his  accounting  department  and  in 
making  sure  that  he  gets  all  the  assistance  and  information  to 
which  he  is  entitled. 

Scope  of  This  Course  in  Accounting. — The  student  will  want 
to  know  what  he  may  expect  to  learn  from  this  first  course  in  the 
fundamentals  of  accounting.  As  the  title  indicates,  it  covers  the 
fundamentals  and  some  of  their  applications.  Any  training  which 
is  worth  while  in  the  business  life  of  the  community  must  of 
necessity  be  severe  and  of  long  duration.  It  is  not  possible,  there- 
fore, in  a  brief  one  year's  course,  to  cover  more  than  the  barest 
fundamentals.  On  a  foundation  which  has  been  securely  laid, 
however,  a  solid  superstructure  may  be  built.  It  is  the  purpose, 
therefore,  of  this  course  to  lay  a  good  foundation.  The  student 
who  really  desires  a  complete  mastery  of  the  subject  will  not  be 
content  with  anything  less  than  a  full  understanding  of  the. 
foundations  on  which  he  expects  to  rest  his  training  for  a  life- 
work.  It  may  be  said  that  at  the  close  of  the  first  year's  work 
he  should  be  able  to  keep  a  simple  set  of  books.  From  the  way  in 
which  the  subject  is  presented,  he  will  have  a  much  surer  founda- 
tion and  will  be  better  able  to  handle  the  ordinary  problems  of  the 
bookkeeper  than  one  who  has  been  trained  by  the  usual  methods. 
This  results  from  the  fact  that  he  is  taught  to  think  about  the 
problems  that  arise  in  the"  keeping  of  records  and  in  the  manage- 
ment of  business.  He  is  led  to  see  the  proper  solution  of  these 
problems.  The  emphasis  is  never  placed  upon  the  mechanical 
operation  of  keeping  the  record,  but  always  on  the  principles 
underlying  the  record,  and  on  the  judgments  which  must  be  made 
in  determining  the  kind  of  record  and  the  way  in  which  it  must  be 
kept.  It  is  in  this  feature  of  the  work  that  its  real  educational 
and  practical  value  lies. 


WHY  STUDY  ACCOUNTING?  9 

Questions 

1.  What  is  the  basic  purpose  of  education? 

2.  Why  are  compulsory  education  laws  in  force  in  most  states? 

3.  Has  the  educated  man  a  better  chance  of  success  than  the  unedu- 
cated or  partly  educated  man?     Why? 

4.  About  what  percentage  of  pupils  completing  the  eighth  grade  enter 
high  schools?    Why? 

5.  About  what  percentage  of  pupils  entering  high  school  complete  the 
four-year  high  school  course? 

6.  Give  some  reasons  for  the  failure  of  pupils  to  complete  a  high 
school  course. 

7.  What  constitutes  a  successful  life? 

8.  Name  five  different  kinds  of  success  in  which  gaining  great  wealth 
is  not  a  part. 

9.  In  what  way  does  rendering  service  play  a  part  in  making  for  success? 

10.  Explain  how  habits  of  thought  formed  in  school  can  be  applied 
after  leaving  school. 

11.  What  is  a  vocation? 

12.  What  caused  the  vocations  to  increase  in  number? 

13.  What  is  meant  when  a  person  is  spoken  of  as  a  "square  peg  in  a 
round  hole?" 

14.  WThat  are  the  two  broad  groups  of  vocations? 

15.  (a)  Name  the  three  subgroups  under  public  service, 
(b)  Explain  each  of  the  three  subgroups. 

16.  What  are  the  two  subgroups  under  private  services? 

17.  What  is  a  profession? 

18.  What  are  non-professional  vocations?     Name  five. 

19.  Why  do  men  strive  for  property? 

20.  Why  does  the  business  man  make  provision  for  gathering,  analyz- 
ing, and  organizing  information  about  his  business? 

21.  What  place  has  accounting  in  business? 

22.  What  educational  value  has  the  study  of  accounting? 

23.  In  what  way  is  reasoning  power  developed  through  a  study  of 
accounting? 

24.  Distinguish  between  public  and  private  accounting. 

25.  Name  the  various  grades  of  positions:  (a)  in  public  accounting; 
(b)  in  private  accounting. 

26.  What  is  a  blind-alley  job? 

27.  Why  is  a  knowledge  of  fundamental  principles  of  accounting  of  more 
importance  than  a  knowledge  of  merely  the  mechanical  side  of  bookkeeping? 


IO  FUNDAMENTALS  OF  ACCOUNTING 

28.  Of  what  value  is  a  knowledge  of  accounting  to  the  business  man? 

29.  Which  of  the  following  courses  is  more  likely  to  lead  to  success 
and  why: 

(a)  A  course  in  which  principles  are  developed  and  then  applied? 

(b)  A  course  in  which  only  the  mechanical  recording  of  information  is 

taught? 

Problems 

1.  Write  a  statement  of  not  more  than  200  words  giving  your  reasons 
for  taking  this  course. 

2.  Make  a  survey  of  your  immediate  neighborhood  (three  or  four 
blocks  in  a  large  city  or  the  entire  business  section  in  a  small  town)  and 
prepare  a  list  of  the  various  kinds  of  business  carried  on. 

3.  Visit  some  business  house  and  prepare  a  detailed  list  of  the  different 
jobs  or  positions  within  that  business. 

4.  Prepare  a  list  of  hot  more  than  five  vocations  in  which  you  are 
interested,  arranging  them  in  the  order  of  their  importance  to  you.  In 
each  case  give  the  reason  for  your  choice. 

5.  Prepare  a  tabulated  list  of  the  things  you  think  a  proprietor  should 
know  about  his  business  in  order  to  manage  it  efficiently. 


CHAPTER  II 

BUSINESS,   ACCOUNTING,   AND   PROPRIETORSHIP 

Purpose  of  Chapter. — 

i .  Meaning  of  the  terms : 

(a)  Things  owned. 

(b)  Things  owed. 

(c)  Net  worth. 

2.  Use  and  application  of  the  bar  graph. 

Business. — In  its  broad  sense  the  term  "business"  means 
that  effort  which  one  puts  forth  to  increase  his  wealth  or  property. 
In  its  narrow  sense  it  is  frequently  understood  to  mean  only  the 
buying  and  selling  of  goods.  However,  one  may  also  buy  and 
sell  services.  Therefore  business,  as  considered  in  this  text,  will 
include  the  purchase  and  sale  of  both  goods  and  services. 

Business  Classified. — Business  is  frequently  classified  in 
accordance  with  the  fundamental  industries  as  follows : 

i.  Extractive— mining,  farming,  lumbering,  etc. 

2.  Manufacturing— the  combining  of  various  articles,  called 

"raw  materials,"  into  a  new  article,  as  the  assembling 
of  an  automobile;  or  in  changing  the  form  of  an  article, 
as  when  logs  are  cut  into  boards.  The  finished  article 
of  one  manufacturing  concern  may  furnish  the  raw 
material  of  another  concern.  The  finished  product  of 
the  sawmill  (lumber)  is  the  raw  material  of  the  furniture 
factory.    Yet  both  are  manufacturing  concerns. 

3.  Trading — buying  and  selling  goods. 

4.  Service — the  furnishing  of   facilities,   conveniences,   or 

personal  services  to  the  conduct  of  the  other  three 
groups. 

11 


12  FUNDAMENTALS  OP  ACCOUNTING 

Each  of  these  large  divisions  may  be  subdivided.  For  ex- 
ample, under  the  extractive  group,  mining  may  be  divided  into 
coal,  iron,  copper,  gold  mining,  etc.,  and  under  the  manufac- 
turing group  is  the  making  of  automobiles,  furniture,  farm 
implements,  machinery,  etc.  Under  the  service  group  are  trans- 
portation, personal  service,  and  miscellaneous.  Transportation 
may  be  subdivided  into  rail,  water,  and  air,  each  of  which  may 
be  further  subdivided  into  passenger,  freight,  etc.  Personal 
service  includes  such  vocations  as  the  law,  engineering,  account- 
ing, etc.  Under  the  miscellaneous  division  may  be  mentioned 
banking,  brokerage,  and  the  insurance,  telephone,  telegraph, 
and  hotel  businesses,  etc. 

Under  the  trading  group  comes  the  distribution  of  shoes,  jew- 
elry, groceries,  etc.  In  this  group  the  things  are  generally  sold  in 
the  form  in  which  they  are  purchased.  Some  articles,  however, 
are  purchased  in  large  quantities  and  sold  in  small  quantities,  as 
sugar  purchased  by  the  barrel  and  sold  by  the  pound.  A  com- 
mon classification  of  trading  is  wholesale  and  retail,  depending 
on  the  quantities  sold.  The  wholesaler  handles  articles  in  large 
quantities,  such  as  dozens,  gross,  boxes,  barrels,  bags,  etc.,  and 
distributes  to  other  dealers  (retailers),  who  sell  in  small  quanti- 
ties to  the  consumer.  The  small  dry-goods,  hardware,  drug,  and 
grocery  stores,  etc.,  are  engaged  in  the  retail  business.  Not  all 
retail  dealers  operate  small  stores,  however.  Witness  the  huge 
department  stores  in  every  large  city,  such  as  John  Wanamaker 
in  New  York  and  Philadelphia,  B.  Altman  and  Company,  Lord 
and  Taylor,  and  others  in  New  York,  Marshall  Field  and  Com- 
pany in  Chicago,  and  Jordan  Marsh  Company  in  Boston.  These 
are  really  groups  of  several  stores  under  one  roof,  each  department 
constituting  a  store  in  itself. 

Accounting. — Accounting  consists  of  gathering  and  presenting 
information  concerning  the  money  values  of  the  things  used  in 
business,  the  debts  owed  to  others,  and  the  proprietor's  net 
worth.    It  grows  out  of  commerce  or  the  exchange  of  things. 


BUSINESS,  ACCOUNTING,  AND  PROPRIETORSHIP  13 

Uncivilized  people  do  not  need  a  system  of  accounting  because 
they  have  little  or  no  property  and  what  little  they  have  is  ex- 
changed directly  by  means  of  barter,  without  the  use  of  money. 
Illustrations  of  barter  are  the  exchange  of  a  bushel  of  potatoes 
for  a  gallon  of  maple  syrup  and  the  exchange  of  several  sheep  for 
a  horse.  In  a  civilized  community  almost  every  person  owns 
property  of  some  kind.  Many  people  also  have  debts,  that  is, 
they  owe  others  for  things  purchased  for  which  full  payment  has 
not  been  made.  In  business  the  buying  and  selling  of  com- 
modities results  in  the  incurring  of  new  debts  and  the  payment  of 
old  debts,  causing  changes  in  things  owned  and  things  owed. 

In  installing  an  accounting  system  for  an  individual  or  group 
of  individuals,  the  facts  that  must  be  known  are  things  owned, 
things  owed  (some  of  the  things  owned  may  not  have  been  paid 
for)  and  the  net  worth  or  difference  between  the  things  owned 
and  the  things  owed. 

Things  Owned. — Practically  everything  which  has  value  may 
be  spoken  of  as  property  or  things  owned.  Examples  are 
shoes,  clothes,  skates,  bicycles,  books,  money,  toys,  pictures, 
musical  instruments,  money  owed  to  one  by  a  friend,  fountain 
pens,  watches,  rings,  cameras,  automobiles,  land  and  buildings, 
etc. 

To  find  the  money  value  of  things  owned  we  estimate  what 
each  article  is  worth  in  money  and  then  find  the  total  value.  This 
may  not  be  the  correct  amount  available  for  business  purposes 
because  we  may  have  included  things  having  a  sentimental  value 
and  things  necessary  for  personal  use. 

Things  Owned  Having  a  Sentimental  Value.  Among  the  things 
owned  there  might  be  a  photograph  of  a  dear  friend  or  relative. 
One  might  not  want  to  part  with  it  for  $100;  but  to  someone 
else  it  might  have  no  value.  This  shows  that  the  article  has 
a  sentimental  or  personal  value  but  no  business  value;  therefore 
it  must  not  be  included  in  any  list  of  things  owned  for  business 
purposes. 


14  FUNDAMENTALS  OF  ACCOUNTING 

Things  Owned  Necessary  for  Personal  Use.  Every  individual 
needs  some  things  for  personal  use,  such  as  clothes,  shoes,  jewelry, 
etc.  One  person  might  want  many  things,  such  as  furniture, 
automobile,  horses  and  carriages,  a  house,  etc.,  for  personal  use, 
while  another  might  prefer  to  use  his  money  for  business  purposes. 

Things  Owned  Used  for  Business  Purposes.  If  one  omits  all 
things  having  a  sentimental  value  and  those  considered  necessary 
for  personal  use,  the  things  that  remain  can  be  used  for  any  other 
purpose.  They  might  be  given  away  or  sold  and  the  money 
obtained  from  their  sale  used  to  buy  other  things  that  people 
want  (things  easily  sold).  These  things  in  turn  might  be  sold 
to  others  for  more  than  the  price  paid  for  them.  It  has  been 
shown  above  that  this  buying  and  selling  of  things  is  one  type 
of  business — trading. 

Things  Owed. — All  of  the  things  owned  for  business  purposes 
are  not  always  fully  available  for  such  use  because  there  may  be 
debts  which  will  have  to  be  paid  in  money  or  its  equivalent. 
These  may  arise  in  various  ways.  There  are  two  types  of  things 
owed — one  payable  in  money,  the  other  not  payable  in  money. 
One  may  owe  a  duty  to  his  parents  or  to  the  government  or  to  a 
friend  for  a  social  call  or  for  an  engagement  to  be  a  guest.  These 
are  things  owed,  but  they  are  not  payable  in  money.  The  fol- 
lowing are  illustrations  of  things  owed  (debts)  that  are  payable 
in  money : 

i .  Suppose  your  bicycle  met  with  an  accident  and  you  have 
not  yet  paid  Robert  Allen,  the  repair  man,  $7  for  repairing  it. 
Among  your  things  owed  would  be,  "Robert  Allen  for  repairs  to 
bicycle,  $7." 

2 .  Charles  Robinson  bought  a  violin  for  $50.  He  paid  $5  at 
the  time  of  purchase  and  agreed  to  pay  $1  per  week  until  the 
violin  is  paid  for.  Suppose  he  has  paid  all  except  the  last  ten 
instalments,  then  among  his  things  owed  would  be,  "Unpaid 
instalments  on  violin  owed  to  H.  Smith,  $10." 

3.  Arthur  Hill  buys  $4  in  groceries  from  the  Modern  Grocery 


BUSINESS,  ACCOUNTING,  AND  PROPRIETORSHIP  15 

Company,  promising  to  pay  next  week.     Among  Arthur  Hill's 
things  owed  would  be,  "Bill  of  Modern  Grocery  Company,  $4." 
Things  owed  are  usually  listed  by  stating  the  name  of  the 
person  or  persons  owed  and  the  amount  in  money. 

Net  Worth. — In  answer  to  the  question  "How  much  are  you 
worth?"  one  might  say.  "All  I  can  earn,  $10  a  day";  another 
might  answer,  "$50,"  thinking  of  the  amount  of  money  in  his 
pocket;  and  still  another  might  say,  "I  am  worth  $6,000,"  having 
in  mind  the  total  money  value  of  all  the  things  he  owns  but  not 
considering  the  amount  of  his  debts  payable  in  money.  One 
frequently  hears,  "So-and-so  is  worth  a  million  dollars,"  and 
many  are  vaguely  aware  that  this  person  must  own  a  lot  of 
things,  but  not  everyone  knows  how  to  find  this  worth. 

To  get  a  clear  idea  of  "worth"  or  "net  worth"  as  used  in 
accounting,  we  must  use  the  two  terms  just  explained— things 
owned  and  things  owed.  Net  worth  is  obtained  by  deducting 
the  total  money  value  of  things  owed  from  the  total  money  value 
of  things  owned;  the  difference  measures  the  amount  of  net  worth. 
As  used  in  business,  then,  "net  worth"  represents  the  owner's 
or  proprietor's  investment  or  equity  in  the  total  things  owned 
which  are  used  in  a  given  business  enterprise.  It  shows  the 
money  value  of  the  things  owned  which  the  proprietor  has  fur- 
nished, while  the  title  "things  owed"  shows  the  money  value 
of  the  things  provided  by  others. 

Title  of  the  Statement. — The  statement  showing  things 
owned,  things  owed,  and  net  worth,  must  be  given  a  definite  date 
and  should  contain  the  name  of  the  proprietor  or  owner  of 
the  things.  Generally  the  heading  will  contain:  (1)  the  name  of 
the  owner,  (2)  what  the  statement  contains,  and  (3)  the  date, 
arranged  in  three  lines  and  centered. 

The  title,  Statement  of  Financial  Condition,  or  Statement  of 
Things  Owned,  Things  Owed,  and  Net  Worth,  may  be  given  to 
this  statement. 


16 


FUNDAMENTALS  OP  ACCOUNTING 


Elementary  Graphs. — A  graph  is  a  form  of  writing  or  device 
that  appeals  to  the  eye.  When  used  in  connection  with  figures 
in  a  report,  graphs  serve  the  same  purpose  as  illustrations  in 
books  and  newspapers — to  attract  attention  and  aid  in  telling  the 
story.  One  of  the  simplest  forms  for  stating  facts  graphically  is 
the  bar  graph  or  diagram.  This  is  a  heavy  line  ■■■  (bar)  ex- 
tended horizontally  or  placed  vertically  on  a  base  line  |.  The  parts 
of  the  bar  that  represent  the  different  divisions  of  the  whole  are 
shown  in  different  colors  or  shaded  differently  (cross-hatched) . 


The  following  condensed  statement  of  things  owned,  things 
owed,  and  net  worth  arranged  in  graphic  form  indicates  how  use 
of  the  bar  diagram  can  be  made  in  the  present  work.  Use 
different  colors  for  each  group  if  desired. 


Tabulated 


Things  owned 


Minus  Things  owed  50 


Equals  Net  worth  30 


Grapl 

lie 

Scale:  Every  quarter  inch  (1/4  in.)  in  the  length  of  the  bar  represents 
a  unit  of  $10  in  money  value. 


Illustration 

Problem:  Henry  Thompson  has  just  graduated  from  high  school 
and  has  been  informed  that  there  is  an  opportunity  to  purchase  the  news- 
paper and  job  printing  press  and  other  material  of  the  Weekly  Star  in  a 
neighboring  town.  Henry's  uncle  is  willing  to  invest  $3,000  to  pay  for  the 
plant,  but  Henry  needs  some  $500  more  to  run  it  during  the  first  month  or 
two.  On  June  10,  1920,  Henry  owns  clothing,  etc.,  valued  at  $150;  dia- 
mond ring  $175;  horse  and  cart  $250;  cornet  $75;  skates  $10;  shot-gun 
$35 ;  rifle  $20;  camera  $25;  war  savings  stamps  $85.50;  on  deposit  in  the 


BUSINESS,  ACCOUNTING,  AND  PROPRIETORSHIP  17 

Central  Savings  Bank  $93.25;  books  $22;  watch  $35;  fountain  pen  $4; 
tennis  racket  $8.  His  debts  are  as  follows:  Jones  and  Brown,  clothing 
merchants,  for  balance  on  suit  $20;  James  Randall,  blacksmith,  for  shoe- 
ing horse  $6,  and  for  repairing  cart  $10;  subscriptions,  to  the  Red  Cross 
$10,  and  to  the  Y.  M.  C.  A.  $20. 

Solution:  With  the  assistance  of  a  friend  who  understands  account- 
ing, Henry  prepares  the  following  statement  showing  his  net  worth  avail- 
able for  business  purposes. 


C/c^^t^y. 


'/ei^/?— 


>y£&^t^J  (sw^z**/: 


<&A 


&  Cc>3-/^~ 


^Stn^  CLebg 


i^ti^»^^^^P<^^t^^^^t^t^d^  J  1*37.7^ 


Tabulated 

Things  owned $603.75 

Things  owed $  66  — 

Net  worth $537-75 


FUNDAMENTALS  OF  ACCOUNTING 
Graphic 


Scale:     Each  1/4  inch  on  the  bar  represents  $50  in  money. 

Comments:  In  the  course  of  the  preparation  of  the  statement  Henry 
said  that  he  intended  to  sell  only  enough  of  his  possessions  to  pay  his  debts 
and  to  provide  about  $500  with  which  to  operate  his  new  business.  He 
decides  to  keep  for  personal  use  all  the  things  he  owns  except  those  listed 
in  the  statement.  If  the  things  owned  which  are  listed  in  the  statement 
should  not  provide  sufficient  money  for  running  his  new  business,  Henry 
will  have  to  borrow  money  or  sell  some  of  the  things  owned  which  have 
not  been  listed. 

The  $3,000  offered  by  Henry's  uncle  has  not  been  received;  therefore 
it  has  been  omitted.  If  it  had  been  received,  it  would  not  change  Henry's 
net  worth,  because  while  $3,000  would  be  added  to  things  owned,  the  same 
amount,  representing  Henry's  debt  to  his  uncle,  would  be  added  to  things 
owed,  leaving  net  worth  unchanged. 

Questions 

1.  (a)  What  is  meant  by  "business"  in  its  broadest  sense?     (b)  In 
its  narrow  sense? 

2.  Can  one  purchase  services?     Explain. 

3.  Classify  business  under  four  distinctive  divisions. 

4.  Give  subdivisions  of  each  of  the  groups  under  3. 

5.  (a)  Distinguish  between  wholesale  and  retail  business, 
(b)  To  which  group  does  each  belong? 

6.  Are  all  retail  stores  small  businesses?     Explain. 

7.  What  is  barter?     Give  an  example. 

8.  What  is  accounting? 

9.  In  installing  an  accounting  system  what  things  must  be  known? 
10.  Does  every  civilized  person  own  property?     Explain. 

n.  (a)  Name  five  things  you  own. 

(b)  How  would  you  determine  their  money  valu^. 


BUSINESS,  ACCOUNTING,  AND  PROPRIETORSHIP  19 

1  a.  Name  some  things  you  own  that  have  a  sentimental  value. 

13.  Name  five  things  you  own  that  are  necessary  for  your  personal  use. 

14.  How  would  you  decide  on  the  things  that  could  be  used  fcr  business 
purposes? 

15.  What  is  meant  by  "things  owed"?     Give  an  example. 

16.  What  is  meant  by  "  net  worth  "?     How  is  it  found? 

17.  How  would  you  arrange  the  information  on  a  statement  showing 
your  net  worth? 

18.  What  is  a  graph? 

19.  What  is  a  bar  graph?     Illustrate. 

20.  How  may  different  divisions  be  shown  on  a  bar  that  represents  the 
whole? 

a  1.  How  may  the  totals  of  things  owned,  things  owed,  and  net  worth 
be  shown  graphically?    Illustrate. 

32.  Explain  the  solution  to  the  Henry  Thompson  problem. 

33.  Why  was  the  $3,000  offered  by  Henry's  uncle  omitted  from  the 
statement? 

34.  What  others  of  his  assets  might  Henry  Thompson  have  chosen  to 
provide  money  for  his  business?     Why? 

Problems 

1.  (a)  Prepare  a  statement  showing  your  net  worth  available  for 
business  purposes. 

(b)  Illustrate  the  statement  by  a  bar  graph. 

Arrange  the  statement  so  as  to  bring  out  most  clearly  the  information 
desired. 

a.  Prepare  such  a  statement,  including  a  graph,  for  one  or  more  of 
the  following:  (a)  your  mother,  (b)  father,  (c)  relative,  (d)  friend. 

These  statements  should  include  only  the  things  owned  and  owed  that 
can  be  used  for  business  purposes. 

3.  From  the  following  information  prepare  a  statement  and  a  graph 
showing  the  financial  condition  of  Charles  Howard  on  June  30,  19 — : 

He  owns  a  pony  and  cart  valued  at  $250;  tennis  racket  $4;  boxing 
gloves  $10;  clothes  (personal)  $100;  bicycle  valued  at  $45  on  which  he  owes 
$20;  camera  $20;  photographs  of  friends  and  relatives  which  he  values  at 
$100,  but  which  cannot  be  sold  for  more  than  5  cents  as  old  paper ;  fountain 
pen  $4 ;  shot-gun  $35 ;  books  $30.    He  owes  for  repairs  to  his  cart  $15. 

4.  Mrs.  Henry  Hill,  having  recently  lost  her  husband,  desires  to  en- 
gage in  the  millinery  business.  She  intends  to  sell  her  household  goods, 
retaining  only  her  personal  wearing  apparel  and  jewelry.    You  assist  her 


20  FUNDAMENTALS  OF  ACCOUNTING 

by  making  a  statement  including  a  graph  as  of  March  25,  19 — ,  showing 
her  net  worth  based  on  the  following  data:  Her  husband's  employers, 
Sinclair  and  Company,  owe  him  $50;  the  Home  Insurance  Company  owes 
$2,000  on  her  husband's  life  insurance  policy;  she  has  $360  in  the  Union 
Savings  Bank;  she  owes  the  doctor,  James  Brown,  $120;  she  owns  a  piano 
valued  at  $450;  household  goods  estimated  to  be  worth  $900;  clothes, 
jewelry,  and  other  personal  belongings  which  she  desires  to  keep,  worth 
about  $300;  she  owes  for  groceries,  milk,  ice,  and  meat,  $42;  she  has  two 
$50  Liberty  bonds,  worth  $50.75  each;  her  husband's  motorcycle  is  esti- 
mated at  $225,  on  which  he  owes  a  repair  bill  of  $31.50. 

5.  After  finishing  high  school,  James  Noyes  wishes  to  go  to  college. 
He  has  only  $75  in  money,  but  he  also  owns  a  bicycle  worth  $50,  a  couple 
of  sheep  which  he  intends  selling  to  his  father  for  $30,  a  colt  worth  $200, 
some  books  which  he  can  sell  for  $10,  and  a  watch  worth  $10.  He  recently 
purchased  a  new  bicycle  tire  from  the  Goodyear  Rubber  Company  for  $3, 
which  is  included  in  the  value  of  the  bicycle  but  is  not  yet  paid  for.  He  also 
owes  the  Harding  Company  $25  for  his  last  suit  of  clothes.  Prepare  a 
statement  showing  his  net  worth  as  of  September  1,  19 — .  Illustrate  this 
with  a  bar  graph. 

6.  Dick  Smith  decides  to  sell  his  property  in  Dayton,  Ohio,  and  move 
to  Cincinnati,  Ohio.  He  asks  you  to  help  prepare  a  statement  of  his  net 
worth  as  of  June  30,  19 — .  You  find  his  house  and  lot  is  worth  $10,000; 
household  goods  $1,000;  five  Liberty  bonds  worth  $50  each;  a  Ford  car 
$300;  money  in  First  National  Bank  $250.  He  owes  for  groceries  $30;  for 
furniture,  which  was  purchased  on  the  instalment  plan  from  Jacob  Mes- 
senger $150;  for  money  borrowed  from  a  friend,  Leonard  White,  $500; 
for  dry -goods  purchased  from  Stern  and  Babcock  Company  $50;  and  he 
still  owes  to  Robert  Jones  $2,000  on  his  house  and  lot.  Illustrate  the  state- 
ment with  a  graph. 

7.  William  Ferris  wishes  to  sell  all  his  possessions  and  pay  all  his  bills 
before  joining  the  army.  From  the  following  information  prepare  a  state- 
ment and  a  graph  showing  his  net  worth  as  of  October  15,  19 — :  auto- 
mobile $700;  vacant  lot  $200;  two  shares  of  stock  in  the  Napoleon  Realty 
Company  at  $100  each;  personal  belongings,  such  as  a  ring,  watch,  etc., 
which  he  also  wishes  to  sell  $100;  his  brother  Harry  owes  him  on  a  loan 
$200;  he  has  $250  in  the  Richmond  Savings  Bank  and  $35  with  him.  He 
owes  garage  rent  to  R.  H.  Freeman  Company  for  2  months  at  $5  per 
month;  to  his  mother  for  board  and  room  $45 ;  to  the  R.  H.  Freeman  Com- 
pany for  repairs  on  his  automobile  $20;  and  to  R.  L.  Kesler  for  shoes  $12. 

8.  Your  mother  owns  a  Victrola  worth  $85;  Victrola  records  $12; 
other  furniture  $438;  food  supplies  in  the  house  $24.50,  for  which  she  still 


BUSINESS,  ACCOUNTING,  AND  PROPRIETORSHIP  21 

owes  K.  N.  Carter,  the  grocer,  $8.75.  She  also  owes  $18.25  to  R.  B. 
Newman's  store  for  clothing,  and  to  Bob  Frey,  the  iceman,  $1.  She  has 
money  amounting  to  $37.50.  What  is  her  net  worth  as  of  August  31, 
19 — ?    Furnish  statement  and  graph. 

9.  R.  N.  Nixon,  an  automobile  tire  repair  man,  wishes  to  sell  out  for  a 
lump  sum  of  money.  In  order  to  know  what  price  to  ask,  he  employs 
you  to  make  up  a  statement  of  his  net  worth  which  you  illustrate  with  a 
graph.  You  find  the  following  on  July  1,  19 — :  Repair  outfit  consisting 
of  benches,  hot  plates,  tools,  etc.,  $200;  raw  rubber  $30;  fabric  $20;  patches 
for  inner  tubes  $8;  patches  for  outside  casings  $10;  air  gauges  $5;  hand- 
pumps  $20;  other  small  accessories  $15;  automobile  tires  on  hand  for  sale 
$225;  bicycle  tires  for  sale  $50.  Bills  owed  to  him  $175.  He  has  $50  in  his 
bank.  His  office  furniture  is  valued  at  $50,  and  office  supplies  $3.  He 
owes  for  goods  purchased  $200;  for  money  borrowed  from  the  Ripley 
County  Bank  $100;  for  rent  of  building  $30;  for  help  employed  $20;  for 
light  and  heat  $5;  for  telephone  $3;  and  for  express  charges  to  Adams 
Express  Company  $5. 

10.  Miss  Virginia  Horton,  whose  father  recently  died  leaving  his  en- 
tire estate  to  her,  wishes  to  know  her  net  worth.  She  furnishes  you  the 
following  information  and  asks  you  to  prepare  a  statement  showing  what 
she  owns  and  what  she  owes.  Her  father  owned  two  pieces  of  property, 
one  worth  $10,000  and  the  other  worth  $15,000.  His  part  ownership  in 
the  Blackwell  Hardware  Company  amounted  to  $5,000,  in  the  E.  H. 
Smith  Realty  Company  to  $3,000.  He  had  county  road  bonds  worth 
$2,000;  five  $100  Liberty  bonds  worth  $102  each.  His  household  furni- 
ture is  valued  at  $2,500;  paintings  $500;  library  $2,000.  His  life  was  in- 
sured with  the  Prudential  Insurance  Company  for  $5,000,  which  has  not 
yet  been  received.  He  paid  $2,000  for  an  automobile  now  worth  $1,500. 
He  owned  a  diamond  ring  worth  $250.  His  bank  account  shows  he  had 
$1,500  in  the  Second  National  Bank.  Miss  Horton  herself  owned  before 
her  father's  death  $200  in  Liberty  bonds  and  a  piano  worth  $500.  Before 
his  death  her  father  gave  her  a  small  car  worth  $500  which  she  finds  was 
purchased  from  the  Ford  Motor  Car  Company  and  has  not  yet  been  paid 
for.  Her  father  also  owed  to  Hudson  and  La  Salle  $150  for  a  set  of  books; 
to  Jacob  Martin  on  real  estate  $5,000;  to  Gray  and  Company,  a  clothing 
firm,  $125;  and  to  J.  H.  Bennett,  his  lawyer,  $75.  His  unpaid  doctor  bill 
amounted  to  $100,  and  funeral  expenses  were  $500.  What  is  Miss  Hor- 
ton's  net  worth  at  the  present  time,  May  15,  19 — ?  Include  a  graph  with 
your  statement. 


CHAPTER   III 
THE   ACCOUNTING   EQUATION 

Purpose  of  Chapter. — 

i.  Meaning  and  use  of  terms  "assets,"  "liabilities,"  and 

"capital." 
2.  Basic  accounting  equation :  Assets  minus  liabilities  equals 

capital. 

Assets. — In  the  practice  assignment  for  Chapter  II  you  pre- 
pared a  list  of  everything  you  owned  and  learned  that  only  those 
things  that  have  a  financial  (money)  value  and  that  are  not 
needed  for  personal  use  could  be  used  for  business  purposes. 
Whatever  can  be  used  for  business  purposes,  the  accountant  and 
the  business  man  call  assets. 

Definition.  An  asset  is  anything  having  financial  value 
that  is  owned  by  one  or  more  persons.  Examples  are:  a  house, 
an  automobile,  a  farm,  a  typewriter,  etc.  Mr.  Brown  has  assets 
which  he  owns  and  Mr.  Jones  also  owns  assets.  Mr.  Brown  can 
list  among  his  assets  only  those  things  which  belong  to  him,  and 
Mr.  Jones  can  list  only  those  which  he  owns. 

Different  persons  may  own  the  same  kind  of  assets,  but  they 
cannot  each  own  the  same  asset.  Mr.  Brown  owns  $100  in 
money  and  Mr.  Jones  $50  in  money.  Mr.  Brown  includes  $100 
in  money  among  his  assets,  but  cannot  include  any  part  of  Mr. 
Jones'  $50.  It  is  possible,  however,  for  two  or  more  persons  to 
own  parts  of  the  same  asset.  Two  or  more  men  may  each  own 
part  of  the  same  building.  A  building  and  lot  worth  $15,000  is 
owned  by  Jones  and  Brown.  Jones  owns  a  2/3  interest,  or 
$10,000,  and  Brown  a  1/3  interest,  or  $5,000.     Jones  would  list 

22 


THE  ACCOUNTING  EQUATION  23 

among  his  assets  $10,000  in  buildings  and  Brown  would  list 
$5,000. 

Liabilities. — All  debts  which  one  will  have  to  pay  in  money- 
are  listed  as  things  owed.  To  all  financial  obligations  the  term 
"liabilities"  is  given. 

Definition.  A  liability  is  any  financial  debt  owed  by  one  or 
more  persons.  When  a  merchant  buys  a  bill  of  goods  for  $1,000 
from  Jackson  and  Smith  and  does  not  pay  for  it,  he  has  incurred  a 
liability  which  would  be  listed  as  "  Unpaid  Purchases  Owed 
Jackson  and  Smith,  $1,000."  If  he  owes  $200  for  rent  to  A. 
Landsdowne,  it  would  be  listed  as  "Unpaid  Rent  Owed  A.  Lands- 
downe,  $200";  and  if  he  owes  his  clerk,  John  Abbott,  $100  for 
services,  it  would  be  shown  as  "Unpaid  Salary  Owed  John 
Abbott,  $100." 

Capital. — In  finding  net  worth  the  amount  of  things  owed  is 
deducted  from  things  owned.  The  difference  indicates  the  pro- 
prietor's investment  in  the  business  enterprise.  Another  name 
for  net  worth  is  "capital." 

Definition.  Capital,  as  used  in  accounting,  is  the  owner's 
investment  in  his  business,  or  the  excess  value  of  assets  over  lia- 
bilities. If  a  person  owns  several  businesses,  he  will  have  a 
separate  capital  investment  in  each.  Carlton  Adams  may  own  a 
grocery  store,  a  flourmill,  and  a  hotel.  The  amount  of  his  capital 
in  each  business  is  the  difference  between  the  assets  and  the  lia- 
bilities of  each  enterprise.  This  may  show  that  he  has  a  capital 
of  $8,000  in  the  grocery  store,  $10,000  in  the  flourmill,  and 
$12,000  in  the  hotel.  To  find  the  amount  of  capital  invested  by 
the  owners  in  any  enterprise,  deduct  the  total  liabilities  from  the 
total  assets. 

The  Equation. — Since  assets  minus  liabilities  equals  capital, 
an  equation  may  express  this  mathematically  as : 

Assets — Liabilities  =  Capital 


24  FUNDAMENTALS  OF  ACCOUNTING 

This  may  be  reduced  to  a  formula  by  using  the  initial  letter  of 
each  word,  thus: 

A— L  =  C 

If  the  assets  of  a  business  are  $800  and  the  liabilities  $300,  the 
capital  is  $500.     Using  the  formula,  we  have: 

A  ($800)— L  ($300)  =  C  ($500) 

Instead  of  arranging  the  information  in  this  form  we  may  more 
conveniently  find  the  capital  by  using  the  vertical  form,  either 
with  or  without  the  mathematical  signs. 

With  Signs  Without  Signs 

A    $800  A    $800 

—  L    $300  L    $300 

=  C    $500  C    $500 

This  equation  is  fundamental.  The  whole  science  of  ac- 
countancy is  based  upon  it.  The  statement  of  financial  condi- 
tion of  every  business  contains  the  three  elements,  assets, 
liabilities,  and  capital. 

Name  of  Student 

Statement  of  Assets,  Liabilities,  and  Capital 

Date 


Assets: 

Cash $500  - 

Due  from  Smith  for  money  lent  to  him 20  - 

Etc.,  etc '. 280  - 

Total $800 

Liabilities : 

Brown  and  Company  for  unpaid  instalments  on 

bicycle $  50  - 

Etc.,  etc 250- 

Total 300 

Capital $500 


THE  ACCOUNTING  EQUATION  25 

Form  of  the  Statement. — The  arithmetical  form  without 
signs  is  the  one  most  frequently  used  when  presenting  the  equa- 
tion as  of  a  given  date.  The  heading  of  the  statement  frequently 
contains  for  its  title  line,  "  Statement  of  Assets,  Liabilities,  and 
Capital."  This  title  is  specific,  and  although  many  other  titles 
are  used  it  answers  our  purpose  very  well  for  the  present. 

It  would  appear  as  shown  on  the  preceding  page. 

Questions 

1.  (a)  Define  "asset." 

(b)  Name  five  assets  belonging  to  your  father. 

(c)  Name  five  of  your  neighbor's  assets. 

2.  Is  health  an  asset?     a  pleasant  disposition?     a  good  education? 

3.  May  an  asset  have  more  than  one  kind  of  value — personal,  sen- 
timental, business? 

4.  Can  all  of  one  asset  be  owned  by  two  or  more  persons?     How? 

5.  Define  "liability."    Name  two  liabilities  of  your  father. 

6.  Is  the  social  call  you  owe  a  friend  a  liability?     Explain. 

7.  Define  "  capital. " 

8.  How  is  the  amount  of  the  proprietor's  capital  in  a  business  enter- 
prise determined? 

9.  (a)  What  is  the  accounting  equation? 
(b)  Reduce  it  to  a  formula. 

10.  How  may  the  equation  be  used  without  signs?     Illustrate. 

11.  What  is  the  advantage  of  the  vertical  form  of  the  equation? 

12.  Why  is  the  equation,  assets  minus  liabilities  equals  capital,  the 
fundamental  equation  of  accounting? 

Problems 

1.  Prepare  a  statement  showing  the  financial  condition — assets,  lia- 
bilities, and  capital — of  a  retail  grocery  business  in  your  city. 

Instructions  for  Making  the  Statement 

If  you  can  make  a  statement  for  a  grocery  business  conducted  by  your 
father,  a  relative,  or  a  friend,  so  much  the  better.  Otherwise  visit  and 
report  on  some  grocery  business  near  your  school.  You  may  be  at  a  loss 
as  to  how  to  gather  this  information.    If  you  are  well  acquainted  with  the 


26  FUNDAMENTALS  OF  ACCOUNTING 

proprietor  you  might  ask  him  to  give  you  the  information,  but  this  would 
not  develop  your  ability  to  gather  data  for  a  financial  statement.  There- 
fore it  would  be  better  to  estimate  the  value  of  the  visible  things,  imagin- 
ing the  other  things  likely  to  exist  in  such  a  business. 

Look  for  two  general  classes  of  assets:  (i)  those  bought  to  sell — in 
other  words,  the  things  in  which  the  grocer  deals;  and  (2)  those  used  in 
carrying  on  the  business,  such  as  fixtures,  desks,  tables,  cash,  etc. 

There  are  many  subdivisions  of  group  (2)  and  you  may  furnish  as  many 
of  these  as  you  wish,  but  only  the  two  main  groups  are  required.  Estimate 
roughly  the  value  of  the  assets  and  try  to  imagine  the  liabilities  of  the 
grocer.  For  example,  he  may  owe  for  some  of  the  goods  in  the  store,  for 
clerks'  services,  etc.  Find  the  proprietor's  capital  and  complete  the  state- 
ment. Do  not  spend  more  than  20  minutes  in  getting  the  necessary  in- 
formation from  the  store. 

2.  Write  a  report  of  not  more  than  150  words  explaining  briefly  how 
you  obtained  the  information  for  your  statement. 


CHAPTER  IV 

THE  CLASSIFICATION  OF  ASSETS  AND 
LIABILITIES 

Purpose  of  Chapter. — 

i.  Classification  and  description  of  the  assets  of  a  trading 

business. 
2.  Classification  and  description  of  the  liabilities  of  a  trading 

business 

Classification. — The  purpose  of  classification  is  to  furnish 
information  in  a  form  more  convenient  for  use.  It  is  not  suffi- 
cient for  purposes  of  management  to  know  that  one  owns  a  cer- 
tain amount  of  assets  and  owes  a  certain  amount  of  liabilities. 
A  better  view  of  the  business  is  furnished  by  presenting  a  list  of 
the  different  kinds  of  assets  and  liabilities,  showing  how  much 
one  owns  or  owes  in  each  group.  Compare  the  statement  that  a 
fleet  contains  60  vessels  with  the  statement  that  the  fleet  is  com- 
posed of  10  battleships,  30  cruisers,  10  torpedo  boat  destroyers, 
and  10  torpedo  boats,  and  note  the  greater  amount  of  information 
contained  in  the  latter. 

In  the  same  manner  compare  the  two  statements  which 
follow. 

It  is  quite  evident  that  statement  B  gives  more  informa- 
tion. 

A 

Assets $20,000  - 

Liabilities 3,000  - 

Capital $17,000- 

27 


28  FUNDAMENTALS  OF  ACCOUNTING 

B 

Assets: 

Money $3»°°°  - 

Goods 8,000  - 

Debts  others  owe  us 4,000  - 

Store  building 4,000  - 

Show  cases,  tables,  etc 1,000  - 

Total $20,000 

Liabilities: 

Debts  owed $2,000  - 

Written  promise  to  pay  money  owed 1,000  - 

Total 3)°°° 


Capital: 

Invested  by  R.  F.  Walker $1 7,000 


Assets. — Depending  on  the  purpose  for  which  the  information 
is  desired,  assets  may  be  classified  in  the  following  ways: 

1 .  According  to  their  physical  characteristics : 

(a)  Tangible,  or  those  easily  evident  to  the  physical 

senses,  such  as  money,  goods,  etc. 

(b)  Intangible,   or   those  not   easily  evident   to   the 

physical   senses,    such   as   patents,    copyrights, 
trade-marks,  etc. 

2.  According  to  their  use  for  business  purposes: 

(a)  Those  acquired  to  sell,  such  as  the  goods  dealt  in 

by  the  merchant. 

(b)  Those  acquired  to  be  used  in  selling  the  goods  dealt 

in,  such  as  store  building,  show  cases,  tables, 
scales,  etc. 

For  the  present  we  shall   use  only   the  second   classifica- 
tion. 

Assets  Acquired  to  Sell. — Assets  included  in   2(a)   are  as 
follows: 


ASSETS  AND  LIABILITIES  CLASSIFIED  2Q 

Merchandise.  The  name  "  Merchandise,"  abbreviated  Mdse. ; 
is  applied  to  that  group  of  things  acquired  through  purchase  or 
manufacture  by  a  business  enterprise  for  the  purpose  of  sale. 
Other  names  for  this  group  are  Stock,  Merchandise  Stock,  Stock- 
in-Trade,  Finished  Goods,  and  Manufactured  Goods.  This 
group  exists  in  every  trading  concern — i.e.,  a  business  where 
goods  are  bought  in  large  quantities  and  sold  in  smaller  quanti- 
ties— and  also  in  manufacturing  enterprises  where  the  article  is 
manufactured  from  the  raw  material  and  then  sold  to  other  con- 
cerns. For  a  grocer,  merchandise  consists  of  tea,  sugar,  canned 
goods,  cheese,  butter,  eggs,  fruit,  goods  in  cartons  or  boxes, 
candy,  vegetables,  etc.  In  fact  it  includes  everything  which  he 
buys  to  sell.  The  main  group,  Merchandise,  may  be  subdivided 
to  any  desired  degree  by  considering  one  or  more  of  the  things 
dealt  in  as  a  distinct  group.  For  example,  a  grocer  might  classify 
his  merchandise  into  the  following  departments:  Dairy,  for  all 
butter,  eggs,  and  cheese;  Fruit  and  Vegetable,  for  all  fresh  fruits 
and  vegetables,  etc. 

Assets  Used  in  Selling. — In  conducting  even  the  smallest 
business,  several  of  the  assets  of  group  2(b)  are  necessary.  These 
are  the  tools  used  to  enable  the  merchant  to  deal  in — buy  and 
sell — merchandise. 

Cash.  This  title  includes  money  and  all  those  instruments 
which  pass  currently  in  business  as  money — in  other  words,  any- 
thing which  will  be  accepted  by  a  bank  as  a  deposit.  Illustrations 
are  gold,  silver,  nickel,  and  copper  coins,  United  States  Treasury 
notes,  gold  and  silver  certificates,  federal  reserve  notes,  federal 
reserve  bank  notes,  national  bank  notes,  post-office  money- 
orders,  express  money-orders,  bank  drafts,  sight  or  demand 
drafts,  checks,  accounts  on  deposit  in  commercial  banks  and 
trust  companies,  etc. 

Expense  Assets.  This  is  a  name  given  to  those  assets  which 
are  consumed  in  a  short  period  of  time,  say  a  year  or  less,  in  con- 
ducting the  business.     They  include  wrapping  paper,  twine, 


30  FUNDAMENTALS  OF  ACCOUNTING 

stationery,  postage  stamps,  pencils,  pens  and  ink,  rent  (right  to 
use  the  building)  paid  for  but  not  yet  used,  services  of  employees 
paid  for  but  not  yet  received,  brooms,  fuel  for  heating  purposes, 
etc.  Other  names  are  Service  Assets,  Consumable  Assets, 
Deferred  Assets,  Prepaid  Expenses,  etc.  It  will  of  course  be 
necessary  to  determine  at  any  given  time  just  what  amount  of 
each  asset  has  been  consumed  in  order  to  measure  its  present 
value.  The  part  which  has  been  consumed  is  no  longer  an  asset. 
For  example:  Suppose  $600  is  paid  for  three  months'  rent  in 
advance,  and  that  after  two  months  have  passed  it  is  desired  to 
know  the  value  of  the  asset  remaining.  When  the  cash  payment 
was  made  the  $600  cash  asset  was  exchanged  for  a  $600  rent 
asset  consisting  of  the  right  to  use  the  building  for  three  months. 
At  the  end  of  two  months  two-thirds,  i.e.,  $400,  of  the  $600  rent 
asset  has  been  consumed,  and  therefore  the  value  of  the  rent 
asset  remaining  is  $200. 

Furniture  and  Fixtures.  This  includes  all  those  things  not 
consumed  in,  say,  one  year,  and  used  along  with  the  building  in 
conducting  the  business.  In  this  class  are  show  cases,  display 
racks,  chairs,  desks,  tables,  typewriters,  riling  cabinets,  rugs, 
cash  registers,  safes,  scales,  etc.  Other  names  are  Store  and 
Office  Furniture  and  Fixtures,  Store  Equipment,  etc. 

Accounts  Receivable.  Under  this  title  are  amounts  owed  by 
customers  or  others.  They  are  legal  claims  for  money,  owned 
by  the  proprietor,  for  which  the  customers  or  others  have  not 
given  written  promises  to  pay  money.  Other  names  are  Cus- 
tomers, Trade  Debtors,  Debtors,  Book  Accounts  Receivable, 
Sales  Ledger  Accounts,  etc.  Usually  accounts  receivable  origi- 
nate from  the  sale  of  merchandise  to  customers  who  do  not  pay 
for  the  goods  at  the  time  of  the  sale.  This  is  called  a  sale  "on 
account,"  as  there  is  an  understanding  that  the  customer  will 
pay  for  the  goods  later.  This  is  brought  about  orally  through 
spoken  words,  by  correspondence  through  letters,  orders,  etc., 
or  implied  because  the  customer  took  the  goods  away  with  him. 
The  merchant  may  keep  the  record  (account)  in  any  convenient 


ASSETS  AND  LIABILITIES  CLASSIFIED  31 

form.  It  may  be  merely  a  slip  of  paper  containing  the  following 
information:  date,  customer's  name,  terms  of  payment,  descrip- 
tion of  goods,  and  money  value;  or  the  record  may  be  kept  more 
formally  in  a  specially  ruled  book  of  accounts. 

Notes  Receivable.  This  title  covers  all  written  promises, 
signed  by  the  maker,  to  pay  to  the  proprietor  a  certain  sum  of 
money  at  a  definite  future  date.  Examples  are  promissory  notes 
receivable,  bills  of  exchange,  certificates  of  deposit,  and  trade 
acceptances  receivable.     The  term,  Bills  Receivable,  is  also  used. 

Delivery  Equipment.  This  includes  all  those  assets  having  a 
life  of  a  year  or  more,  used  in  delivering  or  receiving  merchandise. 
Examples  are  horses,  wagons  and  harness,  automobiles,  trucks, 
bicycles,  racks  and  cases,  if  they  can  be  used  several  times,  etc. 
Other  names  are  Horses,  Wagons  and  Harness,  Motor  Trucks, 
Trucking  Equipment,  etc. 

Securities.  Under  this  heading  are  listed  the  values  of  bonds 
or  stocks  owned  and  sometimes  mortgages  receivable.  It  is  a 
general  term  and  may  cover  Liberty  bonds  or  other  United 
States  bonds,  any  industrial,  mining,  municipal,  or  public  serv- 
ice company  bonds,  capital  stock  of  any  corporation,  etc.  Other 
names  are  Stocks,  Bonds,  Stocks  and  Bonds,  Investments,  or 
the  name  of  the  individual  stock,  bond,  or  mortgage  owned. 

Real  Estate.  This  name  is  given  to  any  interest  in  lands.  In 
a  more  restricted  sense  it  is  understood  to  mean  actual  ownership 
of  lands  and  buildings  used  in  connection  with  a  given  enterprise. 
The  term,  Land  and  Buildings,  is  also  often  used.  Two  head- 
ings, one  Land  and  the  other  Buildings,  are  preferable  because 
they  make  clear  the  amount  invested  in  each  asset. 

Other  Assets.  Under  this  title  are  listed  all  assets  not  classi- 
fied elsewhere.  Thus,  where  notes  receivable  or  other  invest- 
ments, such  as  bonds,  are  owned,  interest  may  have  accumulated 
although  not  yet  due.  This  is  a  proper  asset  and  should  not  be 
overlooked.  It  may  be  listed  with  the  asset,  Notes  Receivable, 
but  as  the  amount  is  usually  small  it  is  best  listed  under  Other 
Assets  or  Accruals. 


32  FUNDAMENTALS  OF  ACCOUNTING 

Liabilities. — 

Accounts  Payable.  This  title  covers  items  of  indebtedness 
which  the  proprietor  owes  to  others  on  account.  They  are  legal 
claims  for  money  owed  by  the  proprietor,  for  which  he  has  not 
given  written  promises  to  pay  money.  Other  titles  are  Creditors, 
Trade  Creditors,  Book  Accounts  Payable,  Purchase  Ledger 
Accounts,  Vouchers  Payable,  etc.  They  usually  originate  from 
the  purchase  of  merchandise  or  other  assets,  payment  not  being 
made  at  the  time  of  purchase.  The  legal  relationship  arises 
from  the  same  acts  as  those  of  customers.  In  fact  the  proprietor 
is  the  customer  of  his  creditors.  Records  may  be  kept  in  the 
same  manner  as  for  accounts  receivable ;  or  one  may  merely  keep 
the  invoices  (bills)  which  he  receives  at  the  time  of  purchase. 
When  payment  is  made  the  invoice  should  be  marked  "Paid" 
and  the  date  of  payment  shown,  after  which  it  should  be  perma- 
nently filed.  It  is  not  advisable  to  destroy  any  business  docu- 
ment for  a  number  of  years,  as  occasions  may  arise  when  it  might 
prove  useful. 

Notes  Payable.  This  heading  covers  all  written  promises 
signed  by  the  proprietor  to  pay  a  certain  sum  of  money  at  a 
definite  future  date.  This  may  include  promissory  notes  payable, 
bills  of  exchange,  and  trade  acceptances  payable.  Another  name 
is  Bills  Payable. 

Mortgage  Payable.  This  liability  is  one  secured  by  a  mort- 
gage, or  lien,  on  the  real  estate  of  the  proprietor.  The  term, 
Purchase  Money  Mortgage,  is  frequently  used.  For  example: 
A  buys  from  B  real  estate  for  a  price  of  $20,000,  agreeing  to  pay 
cash,  $8,000,  at  once,  and  the  balance  of  $12,000  at  some  future 
date.  A  takes  possession  of  and  receives  title  to  the  real  estate 
and  gives  to  B  the  $8,000  cash,  a  note  payable  for  $12,000,  and  a 
document,  called  a  mortgage,  which  gives  B  the  right,  if  A  fails 
to  pay  the  note  when  it  falls  due,  to  take  the  property  and  have  it 
sold,  in  order  to  collect  the  $12 ,000  due  B .  After  all  costs  of  sell- 
ing the  property,  together  with  the  amount  due  B,  have  been 
deducted,  the  balance  belongs  to  A.     If  the  property  sells  for 


ASSETS  AND  LIABILITIES  CLASSIFIED  33 

less  than  enough  to  pay  the  costs  and  the  amount  due  B ,  A  would 
still  owe  B  the  difference.  A,  who  signed  the  mortgage,  is  called 
the  mortgagor,  and  B,  in  whose  favor  it  was  drawn,  is  called  the 
mortgagee. 

Other  Liabilities.  This  includes  those  liabilities  which  have 
accumulated  but  which  have  not  been  classified.  Examples  are 
unpaid  salaries,  interest,  advertising,  wages,  taxes,  insurance, 
rent,  etc.  They  may  or  may  not  be  payable  at  the  time  the  state- 
ment of  assets,  liabilities,  and  capital  is  prepared,  but  neverthe- 
less they  constitute  debts  owed  and  should  be  included  among 
the  liabilities.     Sometimes  they  are  listed  as  Accruals. 

Questions 

i.  What  is  the  purpose  of  the  classification  of  assets  and  liabilities? 

2.  Under  what  six  titles  would  you  list  the  assets  of  a  business  if  you 
were  limited  to  that  number  in  a  system  of  classification?  Give  reasons 
for  your  choice. 

3.  What  is  merchandise  for  each  of  the  following  businesses: 
hardware?  dry-goods?  coal?  meat?  drug?  shoe?  furniture?  station- 
ery? 

4.  Give  subdivisions  of  merchandise  or  departments  for  each  of  the 
types  of  business  listed  under  Question  3. 

5.  What  does  a  laundry  deal  in?  taxicab  stand?  street  railway? 
trucking  company? 

6.  How  can  you  tell  whether  to  classify  a  thing  as  expense  or  furniture 
and  fixtures? 

7.  Is  cash  money  or  is  money  cash? 

8.  Name  three  things  which  are  classed  as  "securities." 

9.  How  would  you  distinguish  between  accounts  receivable  and  notes 
receivable? 

10.  What  is  an  accrued  asset?    Name  two. 

11.  What  is  an  accrued  liability?    Name  five. 

12.  What  is  the  difference  between  accounts  payable  and  notes  pay- 
able? 

13.  What  is  real  estate?    What  other  names  may  be  used? 

14.  Why  is  the  term  "Other  Assets"  an  objectionable  term  to  use? 

15.  What  is  a  mortgage?    When  is  it  classed  as  an  asset?    as  a  lia- 


bility 


34  FUNDAMENTALS  OF  ACCOUNTING 

Problems 

i.  Make  another  trip  to  the  grocery  store  and  this  time  try  to  recog- 
nize as  many  different  kinds  of  assets  and  liabilities  as  possible,  keeping  in 
mind  the  classification  given  in  this  chapter.  Estimate  their  values  and 
prepare  a  statement  showing  assets,  liabilities,  and  capital. 

2.  Henry  Smith  furnishes  you  with  the  information  given  below  and 
requests  you  to  prepare  a  statement  showing  his  financial  condition  as  of 
November  15,  19 — .  Merchandise  $7,460;  cash  $1,640;  store  building  and 
land  estimated  to  be  worth  $14,700;  customers  owe  on  account  $1,500; 
customers  owe  on  written  promises  to  pay  money  (notes  receivable) 
$2,000;  auto  delivery  truck  valued  at  $800.  He  owes  creditors  on  ac- 
count $1,200,  and  on  written  promises  to  pay  money*  (notes  payable) 
$1,000;  he  owes  clerks  for  salaries  $150;  and  taxes  to  the  amount  of  $200 
are  unpaid.  He  owns  $500  worth  of  Liberty  bonds.  Using  only  the 
amounts  of  total  assets,  total  liabilities,  and  capital,  show  graphically 
the  above  information  at  the  bottom  of  your  statement.  (See  page  17 
for  illustration.) 

3.  You  wish  to  help  your  father,  who  is  a  gardener,  prepare  a  state- 
ment of  his  assets,  liabilities,  and  capital  as  of  August  1,  19 — .  His  house 
and  barn,  worth  $5,000,  are  not  fully  paid  for  because  Davis  David  has  a 
mortgage  of  $1,000  on  them.  The  land  including  garden  is  valued  at 
$1,200;  garden  truck  ready  for  sale  $330;  accounts  receivable  for  vege- 
tables $52;  horse  and  wagon  $175.  He  owes  on  a  note  for  horse  and  wagon 
$75;  owes  you  for  helping  in  the  garden  $3.  Garden  implements  are 
valued  at  $11.50.  Your  neighbor  owes  him  $6.50  for  garden  work  done. 
Prepare  graph. 

4.  You  are  employed  by  John  Pratt,  a  jeweler,  to  prepare  a  statement 
of  his  assets,  liabilities,  and  capital.  After  examining  his  books  on  May  1 , 
19 — ,  you  make  up  his  statement  from  the  following  information:  Watches 
of  different  varieties  $750;  rings  $475;  brooches  $50.  Owes  on  account  to 
E.  M.  Day  for  jewelry  purchased  $350;  to  American  Express  Company  foi 
expressage  on  fixtures  $3;  to  clerks  for  accrued  salaries  $38.  He  has  cash 
in  the  bank  and  on  hand  $475 ;  stock  of  bracelets  valued  at  $75 ;  lavalieres 
$82;  fancy  chains  $35.  His  show  cases  and  other  fixtures  are  worth  $78; 
accounts  receivable  $650;  a  desk  and  a  typewriter  $125;  stationery,  post- 
age stamps,  etc.,  $12.  He  owes  on  a  note  for  the  typewriter  $95 ;  1  month's 
rent  unpaid  $20.  There  is  a  bill  against  him  for  electric  light  amounting 
to  $4.    Prepare  graph. 

5.  Mr.  R.  N.  Block,  dealer  in  women's  ready-made  clothing,  asks 
you  to  rearrange  his  financial  statement,  grouping  the  assets  and  liabilities 


ASSETS  AND  LIABILITIES  CLASSIFIED  35 

according  to  their  use  and  prepare  a  graph.    The  following  is  the  statement 
as  prepared  by  Mr.  Block  on  March  1,  19 — : 

Assets: 

Office  furniture  and  fixtures $    300  - 

100  suits,  cost  $20  each 2,000  - 

50  fancy  white  waists,  average  cost  $5.25  each  262.50 

25  fancy  colored  waists,  average  cost  $6.00  each  150  - 

75  plain  waists,  average  cost  $1.19  each 89.25 

Delivery  car 475  ~ 

Office  supplies 1 50  - 

125  pairs  of  shoes,  average  cost  $5.00  each. . . .  625  - 

U.  S.  bonds 550  - 

Stock  of  hosiery 28  - 

Goods  in  millinery  department 325.25 

Cases,  tables,  etc.,  in  store 200  - 

Other  items  of  merchandise 415  - 

Cash 927.15 

Accounts  receivable 1,280.85 

Store  building  and  lot 3,000  - 

Total  Assets $10,778  - 

Liabilities : 

La  Salle  and  Koch,  wholesale  clothiers,  on  ac- 
count    $1 ,500  - 

For  light,  heat,  and  gas 15  - 

Adams  Express  Company  for  expressage 12.70 

Notes  payable  to  James  Law  for  merchandise .  750  - 

Mortgage  on  store  building 1,275  ~ 

Unpaid  telephone  bill 8.30 

Potter  and  Company,  wholesale  shoe  house,  on 

account 379  - 

Madison  Millinery  Company,  on  account 94  - 

Accrued  salaries 1 26.80 

Owe  Henry  Jones  for  stationery 10.20 

Notes  payable  for  delivery  car 250  - 

Total  Liabilities 4,421  - 

Capital $  6,357  - 


36  FUNDAMENTALS  OF  ACCOUNTING 

6.  Mrs.  Amos  Black  is  preparing  to  open  a  girls'  private  school.  After 
buying  what  is  necessary  for  the  operation  of  the  school,  she  asks  you  to 
prepare  a  statement  and  graph  of  assets,  liabilities,  and  capital  as  of  Sep- 
tember i,  19 — .  She  owns  furniture  worth  $3,500;  household  fixtures 
other  than  furniture  $200;  food  supplies  $75;  school  supplies  $50;  cash  in 
Provident  Savings  Bank  $800;  cash  in  the  house  $50;  a  typewriter  worth 
$75;  four  $50  Liberty  bonds;  a  house  and  lot  in  a  near-by  town  worth 
$5,000.  She  owes  on  account  $50  to  the  Stone  Book  Store  for  school- 
books;  $25  to  the  Corner  Grocery  for  food  supplies;  $10  to  Baker  Piano 
Company  for  Victrola  records.  She  owes  the  Knabe  Piano  Company 
$300  unpaid  instalments.  She  owes  $500  to  her  brother  for  money 
borrowed  for  which  she  gave  him  her  note. 

7.  From  the  following  information  prepare  a  statement  and  graph  of 
the  financial  worth  of  the  Burroughs  Adding  Machine  Company's  Toledo, 
Ohio,  branch  as  of  January  1,  19 — :  20  calculating  machines  on  hand  at  a 
total  cost  of  $2,500;  20  ledger  posting  machines,  10  of  which  cost  $600  each 
and  the  other  10  $800  each.  Unpaid  freight  amounts  to  $8;  office  furni- 
ture and  fixtures  $250;  a  stock  of  30  listing  machines  at  $75  each.  The 
branch  owes  the  Burroughs  factory,  on  account,  $5,000;  accounts  payable 
for  sundry  items  $150;  office  stationery,  price  lists,  etc.,  are  valued  at  $60; 
rent  of  the  building  paid  in  advance  $125;  accrued  salaries  $325;  sales- 
men's expenses  unpaid  $95;  accounts  receivable  $3,649.08;  notes  receivable 
$1,876.92;  cash  $750. 

8.  You  are  requested  to  assist  the  School  Book  Store  in  preparing  a 
statement  and  graph  of  its  assets,  liabilities,  and  capital  as  of  December  31 , 
19 — .  From  an  examination  of  the  store  you  find  the  following:  textbooks 
on  hand  $557;  books  on  fiction  $213;  an  account  payable  to  the  Leighton 
Book  Concern  $156.18;  stationery  and  notebooks  on  sale  in  theN  store 
valued  at  $116;  pencils,  pens,  ink,  etc.,  for  sale  $22;  accounts  receivable 
$75.80;  desks,  chairs,  filing  cabinets,  etc.,  $90;  a  cash  register  recently 
purchased  for  $75  against  which  is  owed  to  the  National  Cash  Register 
Company  $35  on  a  note;  cash  in  the  Continental  Bank  $84.71 ;  in  the  cash 
drawer  at  the  store  $3.49.  There  is  a  stock  of  post-cards  valued  at  $12; 
maps  $8;  pencil-sharpeners,  paper  weights,  etc.,  $18.  Accrued  salaries 
for  clerk  hire  $34;  one  month's  rent  of  storeroom  unpaid  $40;  notes  re- 
ceivable $47;  unpaid  bills  for  light  and  heat  $14.82.  An  old  typewriter 
is  worth  $35. 

9.  Dr.  H.  L.  Nelson  gives  you  the  following  information  from  which 
he  wishes  prepared  a  statement  and  graph  of  assets,  liabilities,  and  capital 
as  of  June  30,  19 — :  house  and  lot  where  he  lives  and  has  his  office  $5,450; 
a  garage  which  he  recently  built  at  a  cost  of  $425.     His  automobile  is 


ASSETS  AND  LIABILITIES  CLASSIFIED  37 

worth  $1,400,  against  which  the  United  Motor  Car  Company  holds  two 
notes  of  $500  each.  Unpaid  taxes  on  his  property  amount  to  $148.  He 
has  another  house  valued  at  $2,500  which  he  rents  to  Henry  Hanson.  All 
rent  is  paid  up  to  date.  The  doctor  holds  a  note  for  $400  against  Mrs. 
J.  H.  Kennitt.  From  an  examination  of  papers  in  his  safe-deposit  box 
at  the  Milan  State  Bank  you  find  he  has  stocks  and  bonds  valued  at 
$1,975.  He  owes  the  Wilde  Drug  Company  $85.  Accrued  salary  of 
office  clerk  amounts  to  $15.  His  household  goods  are  valued  at  $1,200; 
office  furniture  and  fixtures  $675;  medicines  on  hand  $360;  cash  $716.80; 
accounts  receivable  for  services  rendered  $609.20.  He  owes  to  the  J.  L. 
Coons  Company  a  clothing  bill  of  $89.90;  to  the  Home  Grocery  Company 
$28.10. 

10.  The  Studie  Furniture  Company  employed  you  to  prepare  for  them 
a  statement  and  graph  of  their  assets,  liabilities,  and  capital  as  of  October 
31,  19 — .  They  furnished  you  with  the  following  information:  Merchan- 
dise $9,765,  for  which  they  still  owe  the  Thompson  Wholesale  Furniture 
Company,  on  account,  $3,729,  and  on  notes  payable  $1,271.  They  have 
cash  in  the  Union  Trust  Bank  amounting  to  $1,410  and  in  their  cash 
drawer  $125.40.  They  rent  their  store  building  from  Pope  and  Shank, 
to  whom  they  have  paid  2  months'  rent  in  advance  at  $150  per  month. 
Customers  owe  them  on  account  $5,829.35  and  they  have  notes  signed  by 
customers  amounting  to  $1,500.  They  owe  clerks  for  salaries  $200;  book- 
keeper $20.  Their  unpaid  telephone  bill  is  $5.25.  Freight  and  express 
charges  for  the  month  of  October,  not  yet  paid,  amount  to  $18.75.  Office 
supplies  on  hand,  such  as  stationery,  price  lists,  etc.,  are  valued  at  $24; 
office  furniture  and  fixtures  used  in  conducting  the  business  $228.25. 
A  motor  truck  for  delivering  furniture  is  estimated  to  be  worth  $1,800. 

11.  R.  L.  Glasgow,  a  farmer  living  near  Napoleon,  Ind.,  in  order  to 
open  an  account  with  a  hardware  company  in  Indianapolis,  finds  it  neces- 
sary to  submit  a  statement  showing  his  assets,  liabilities,  and  capital.  He 
furnishes  you  with  the  following  information  and  asks  you  to  make  a 
statement  and  graph  as  of  October  10,  19 — .  His  farm  is  worth  $6,700, 
against  which  his  father  holds  a  mortgage  of  $4,000.  He  advises  you  he 
is  in  no  hurry  to  pay  the  mortgage  because  his  father  is  in  no  immediate 
need  of  the  money.  He  has  a  delivery  truck,  fully  paid  for,  which  is  worth 
at  the  present  time  $550;  stock  of  grain  in  his  barn  $670;  Liberty  bonds 
$1,200;  hay  in  the  barn  $35.  He  owes  John  Eckert  and  Son  $32.75  for  a 
tire  and  $9.25  for  repairs  to  his  truck.  Accrued  wages  owed  to  farm  hands 
$32.  Cash  in  bank  $487.50;  wagons,  buggy,  harness,  etc.,  $335;  house- 
hold goods  $800;  livestock,  including  hogs,  cows,  sheep,  etc.,  $1,060;  three 
horses  valued  at  $900.     The  Napoleon  Milling  Company  owes  him  $95.80 


3°'  FUXDAMEXTALS  OF  ACCOUNTING 

for  grain  sold  to  them.  He  has  a  check  for  $50.20  in  the  house  recently 
received  for  the  sale  of  some  sheep.  He  owns  three  shares  of  stock  in  the 
Napoleon  State  Bank  worth  $178  per  share.  He  owes  J.  M.  Martin's 
store  $37.25  for  clothing  purchased  for  his  family.  Taxes  accrued  but 
not  yet  due  amount  to  $125. 

12.  K.  T.  Baldwin,  who  has  a  small  sporting  goods  store,  furnishes 
you  with  a  memorandum  of  the  following  assets  and  liabilities,  from  which 
you  are  to  make  up  a  statement  and  graph  as  of  July  1,  19 — ,  showing  his 
capital:  baseballs  on  hand  valued  at  $50;  boxing  gloves  $75;  tennis  rackets 
$45;  ball  bats  $25;  accounts  payable  $318;  accrued  salaries  $36;  shoes 
of  various  kinds  $82;  caps  $24;  notes  payable  $75;  unpaid  telephone  bill 
$5;  show  cases  and  fixtures  $97;  office  desk  $18;  stationery  for  use  in  the 
business  $11;  accounts  receivable  $510;  bathing  suits  $95;  coal  on  hand 
remaining  from  last  winter  $14;  unpaid  rent  $18;  cash  in  Second  National 
Bank  $65. 


CHAPTER  V 
VALUATION   OF  ASSETS   AND   LIABILITIES 

Purpose  of  Chapter. — 

i.  Determination  of  values  at  a  given  date. 
2.  Preparation  of  inventories. 

Valuation. — The  general  purpose  of  valuating  the  assets  and 
liabilities  of  a  business  concern  is  to  determine  the  amount  of 
capital  invested.  The  correct  value  of  an  asset  is  judged  (esti- 
mated or  appraised)  by  its  worth  as  used  in  carrying  on  the  busi- 
ness of  which  it  is  a  part.  This  is  spoken  of  as  "going  concern " 
value  when  applied  to  a  concern  continuing  in  business,  as  dis- 
tinguished from  a  valuation  made  for  a  concern  about  to  go  out 
of  business  and  so  forced  to  sell  its  assets  for  whatever  a  buyer 
will  pay. 

Procedure  in  Valuation. — Having  determined,  in  Chapter 
IV,  the  various  assets  and  liabilities  of  the  ordinary  trading  busi- 
ness, such  as  a  retail  grocery,  we  shall  now  show  how  to  arrive  at 
the  value  of  each  of  the  assets  and  liabilities  in  the  grocery  busi- 
ness of  Henry  Martin  at  Kenton,  Ohio.  The  procedure  to  be 
followed  usually  consists  in  preparing  a  list  of  the  items  under 
each  classification  together  with  such  other  information  as  may 
be  of  use.  When  each  kind  of  asset  or  liability  is  studied,  the 
student  should  assume  that  he  is  actually  doing  the  work  in  the 
store.  When  the  required  work  has  been  completed,  ask  your 
grocer  or  some  other  business  man  how  he  would  have  proceeded. 
He  may  point  out  devices  which  may  be  helpful  to  you. 

Cash. — The  value  of  this  asset  is  found  by  preparing  a  list  of 
all  the  things  constituting  cash.    All  the  money  and  checks  in  the 

39 


40 


FUNDAMENTALS  OF  ACCOUNTING 


safe,  cash  register,  or  cash  drawer,  are  counted  and  a  list  is  made 
of  the  number  of  pieces  of  each  denomination,  as  follows: 


Cash 
August  s,  19— 


Schedule  No.  1 


Money: 
Bills 

Quantity                    Denomination  Amount 

1  $100  $100  - 

2  50  100  - 
4  20  So- 
io  10  100- 
iS  5  75- 

3  26- 
30  1  30  - 

Total  Bills $491  - 

Coin 

Gold 

4  $5-  $   20- 

Silver,  etc. 

2  1  -  2  - 

25  -5o  12.50 

60  .25  15- 

50  .10  5  " 

•50  .05  2.50 

60  .01  .60 

Total  Coin 57-6o 

Total  Money $548.60 

Checks: 

L.  C.  Smith $20  - 

U.  R.  Wade 7.40 

Henry  Rogers 11 .50 

Total  checks 38.90 

Cash  in  the  store  (money  and  checks) $587.50 


VALUING  ASSETS  AND  LIABILITIES 


41 


Cash  in  the  store  (money  and  checks) 

On  deposit  in  the  First  National  Bank $1,242.10 

Less  checks  issued  but  not  yet  paid  by  the  bank 


50 


No. 
62 
78 
95 


O.  K.  8/5/- 
B.  Q.  Student 


Amount 

$  14-7° 

2-35 

110.45 


127.50 


Net  amount  in  the  bank  still  subject  to  check 1,114.60 

Total  Cash $1,702.10 


To  fix  responsibility,  each  list  should  be  signed  or  initialed  by 
the  one  who  prepared  or  verified  the  list.  Counterfeit  money  or 
worthless  checks  will  be  omitted  from  the  good  items.  It  is 
generally  sufficient  to  add  a  memorandum  of  the  bad  items, 
stating  the  maker  of  the  check  and  the  amount,  and  in  the  case 
of  counterfeit  money,  the  kind,  denomination,  and  amount. 

Notes  Receivable. — The  value  of  this  asset  is  found  in  the 
same  manner  as  cash.  Any  written  promises  to  pay  money,  signed 
by  others,  will  usually  be  found  in  the  safe.  It  is  frequently  advi- 
sable to  give  additional  information  as  shown  by  Schedule  No.  2. 


Schedule  No.  2 


Notes  Receivable 
August  s,  19— 


Name  of  Maker 

Date 
Issued 

Time 

Date 
Due 

Face 

Rate  of 
Interest 

Time 
Elapsed 

Accrued 
Interest 

Ray  Bennett 

C  C  Hughes 

H.  F.  White 

19— 
July  S 
Aug.  1 
June  6 

3  mo. 
60  da. 
90  da. 

19— 
Oct.      5 
Sept.  30 
Sept.    4 

$200  - 

70- 

150- 

6% 
none 
6% 

1  mo. 

4  da. 

60  da. 

$1  - 
none 
1. So 

Total 

$420- 

*  This  item  is  not  to  be  included  in  the  total  of  this  schedule,  being  shown  here  only  as  a 
matter  of  convenience  in  figuring  the  amount  accrued.      It  appears  in  Schedule  No.  10. 


42 


FUNDAMENTALS  OF  ACCOUNTING 


The  value  of  the  Notes  Receivable  may  be  shown  in  the 
statement  of  financial  condition  as  $420  and  Accrued  Interest, 
$2.50,  entered  separately.  Sometimes  the  two  are  combined  as 
Notes  Receivable  and  Accrued  Interest,  $422.50. 

Accounts  Receivable. — There  must  be  a  record  showing  how 
much  each  customer  owes.  This  may  be  in  the  form  of  slips  of 
paper,  cards,  or  a  book  account.  If  kept  in  a  book,  there  might 
be  a  separate  page  for  each  customer.  The  books  should  be  kept 
in  the  safe  when  not  in  use.     The  following  schedule  is  prepared: 


Accounts  Receivable 
August  5,  19— 


Schedule  No.  3 


Name 


J.  Cohen 

A.  Harris 

Charles  Howard 
Donald  Kean .  .  . 
Robert  Kingsley 
C.  A.  Mullen... 
Richard  Norris . 
Peter  Peterson .  . 
C.  N.  Smith 
John  Van  Ness . 
Total 


When  Due 


Aug.     5 

1 

Sept.    1 

Aug.  12 

"  30 
Sept.  20 
Aug.  15 

"  20 
July  20 
Aug.  25 


Amount 


15-30 

I9-I5 
8.80 
21.10 
17.60 
57-75 
16.95 
35-25 
11.40 
6.30 


$209.60 


Worthless  or  uncollectible  accounts  should  be  omitted  be- 
cause they  do  not  represent  claims  having  a  financial  value.  A 
separate  list  of  these  should  be  prepared  to  show  the  loss  incurred 
from  this  source  during  the  period.     Sometimes  the  schedule  is 


VALUING  ASSETS  AND  LIABILITIES  43 

made  in  two  parts,  one  for  good  accounts,  the  other  for  doubtful 
accounts. 

Merchandise. — This  asset  comprises  all  the  things  in  which 
the  proprietor  deals.  They  will  be  found  in  the  storeroom  and 
on  the  shelves.  In  the  storeroom  will  be  found  full  cases,  boxes, 
barrels,  and  packages  of  goods,  while  on  the  shelves  and  other 
places  of  display  will  appear  the  broken  lots  and  goods  unpacked 
from  the  containers,  etc.,  in  which  they  were  shipped.  In  pre- 
paring the  merchandise  schedule  it  is  a  good  plan  to  use  a  sepa- 
rate list  for  each  kind,  such  as  (i)  canned  goods,  (2)  butter,  eggs, 
and  cheese,  (3)  tea  and  coffee,  (4)  spices,  (5)  cereals,  (6)  candies, 
(7)  cookies,  crackers,  etc.,  (8)  tobacco  and  cigars,  (9)  sundries 
(articles  too  small  in  quantity  to  warrant  separate  lists).  The 
quantity  of  each  article  is  determined  and  entered  on  the 
list.  The  various  articles  are  then  valued,  i.e.,  priced.  The 
multiplications  and  extensions  are  then  made  and  the  total 
shown.  The  summary  of  all  the  lists  will  show  the  value  of  the 
merchandise  on  hand.  This  work  is  known  as  "taking  stock" 
or  "inventorying,"  and  the  list  is  called  a  "stock  list"  or 
"inventory." 

Pricing  the  Inventory. — The  articles  are  listed  at  cost  or 
market  price,  whichever  is  lower.  When  market  price  is  higher 
than  cost  price,  market  price  is  not  used  because  this  would  show 
in  the  statement  of  financial  condition  the  asset,  Merchandise, 
at  a  value  higher  than  it  cost,  which,  as  the  student  will  see  later, 
would  result  in  anticipating  profits — the  taking  of  profits  before 
earning  them.  Furthermore,  the  market  price  is  not  always  an 
indication  of  what  the  goods  may  be  sold  for,  because  the  price 
may  drop  before  the  sale  is  made. 

To  illustrate  this,  suppose  that  an  article  costing  $5  has  a 
market  value  of  $6  at  inventory  time.  It  should  not  be  listed  at 
$6  because  something  more  must  be  done  before  the  extra  dollar 
of  increase  can  be  realized.     It  must  be  sold.     If  $6  is  then  re- 


44 


FUNDAMENTALS  OF  ACCOUNTING 


ceived  for  it  a  profit  has  actually  been  made,  since  the  business 
now  has  $6  cash  in  place  of  the  $5  merchandise.  Profit  comes 
only  when  goods  are  sold  and  not  from  pricing  for  the  inventory. 
Accordingly  merchandise  should  be  priced  at  cost,  or,  to  make 
sure  that  it  is  conservatively  valued,  at  market  price  if  that  is 
less  than  cost  price.  Shelf-worn,  damaged,  or  out-of-date  stock, 
must  be  priced  at  a  figure  likely  to  be  realized,  considering  the 
decrease  in  value  of  the  asset  that  has  taken  place. 

To  illustrate  the  form  of  the  inventory,  we  shall  show  only 
one  inventory  list  and  assume  that  all  others  have  been  prepared 
in  like  manner. 


Canned  Vegetables 

August  5,  19— 


Schedule  No.  4 
List  No.  1 


Quantity 

Price 

(In  dozens) 

Article 

Per  dozen 

Amount 

36 

Excelsior  Corn 

$1.40 

$  50.40 

10 

Golden  Pumpkin 

i-75 

i7-5o 

15 

4X  Tomatoes 

1.30 

19.50 

8  1/2 

Baby  Beets 

2  - 

17- 

20 

Early  June  Peas 

1.50 

3°" 

7  (cans  only) 

Heinz  Baked  Beans 

1.80 

1.05 

6 

String  Beans 

1.60 

9.60 

3 

Gilt  Edge  Asparagus 

2.40 

7.20 

1  1/2 

Jersey  Spinach 

1.90 

2.85 

Total 

$i55-io 

The  complete  inventory  would  be  made  up  from  the  separate 
lists  as  follows : 


VALUING  ASSETS  AND  LIABILITIES 


Merchandise  Inventory 
August  5,  19 — 


45 

Schedule  No.  4 
Summary 


List  No. 

Title 

Amount 

1 

Canned  Vegetables 

$    155.10 

2 

Canned  Fruit  and  Jellies 

174-65 

3 

Sugar 

65-45 

4 

Cereals,  Macaroni,  etc. 

97.90 

5 

Teas  and  Coffees 

186.70 

6 

Flour 

76.35 

7 

Cookies,  Crackers,  etc. 

34-5° 

8 

Butter,  Eggs,  and  Cheese 

176.40 

9 

Spices,  Baking  Powder,  etc. 

98- 

10 

And  all  other  lists 

872.20 

Total 

$1,937-25 

Expense  Assets. — In  another  schedule  will  be  placed  all  those 
things  which  are  to  be  consumed  in  a  short  period  of  time  in 
operating  the  business.  Instead  of  determining  the  exact  amount 
and  value  of  wrapping  paper,  twine,  paper  bags,  stamps,  station- 
ery, coal,  insurance  paid  in  advance,  etc.,  which  are  on  hand, 
merely  a  rough  estimate  of,  say,  $150,  may  be  shown  as  Schedule 
No.  5.  To  be  exact,  a  schedule  similar  to  the  merchandise  in- 
ventory would  be  prepared.  All  items  must  be  priced  at  cost, 
because  they  are  not  to  be  sold  but  consumed,  and  their  value 
therefore  steadily  decreases. 

Furniture  and  Fixtures. — We  list  each  desk,  table,  chair,  rug, 
safe,  typewriter,  etc.,  used  in  operating  the  business  and  enter 
opposite  each  its  present  value  to  a  going  concern.     For  this  pur- 


46 


FUNDAMENTALS  OF  ACCOUNTING 


pose,  we  may  look  up  the  bills  received  at  the  time  of  purchase 
and  estimate  the  amount  each  item  has  decreased  in  value  since 
then.  If  the  bills  cannot  be  found,  new  articles  of  the  same  kind 
may  be  priced  and  an  estimate  made  of  the  value  of  the  furniture 
and  fixtures  in  use.  Assume  that  these  articles  have  been  listed 
in  Schedule  No.  6  at  a  total  of  $730. 

Delivery  Equipment. — This  business  uses  a  Ford  delivery  car 
two  years  old,  estimated  to  be  worth  S400.  The  grease  and  gaso- 
line on  hand  have  been  included  among  the  expense  assets. 
Assume  that  Schedule  No.  7  states  the  articles  on  hand  at  their 
value  of  $400. 

Securities. — These  assets  consist  of  stocks,  bonds,  and  mort- 
gages, and  the  proprietor  would  be  asked  to  submit  them  to  us 
for  examination.  They  will  usually  be  found  in  a  safe-deposit 
box  at  the  bank  or  in  the  safe.  Since  these  investments  are  more 
or  less  permanent  we  shall  list  them  at  the  price  paid  for  them  and 
add  a  footnote  stating  the  market  price  on  the  date  listed.  The 
market  price  fluctuates  and  may  be  more  or  less  than  on  the  day 
purchased,  but  the  amount  earned  each  interest  period — 6  months 
in  this  case— will  always  be  the  same,  since  the  interest  rate  does 
not  change. 

Schedule  No.  8 
Securities 

August  5,  19— 


Quantity 

Denomination 

Amount 

Description 

Interest 
Rate 

Interest 
Periods 

Time 
Elapsed 

Accrued 
Interest 

S 
4 

$50 
SO 

$250 
200 

U.  S.  Liberty 

Bonds 
U.  S.  Victory 

Notes 

3  1/2% 

4  3/4 

June  is  & 
Dec.  is 

May  20  S. 
Nov.  20 

Si  da. 
77  da. 

$1.22 

2  - 

9 

$4  50 

J3.22* 

*  This  item  is  not  to  be  included  in  the  total  of  this  schedule,  being  shown  here  only  as  a 
matter  of  convenience  in  figuring  the  amount  accrued.     It  appears  in  Schedule  No.  10. 


VALUING  ASSETS  AND  LIABILITIES  47 

We  find  nothing  but  Liberty  bonds  and  Victory  notes  on 
hand. 

Real  Estate. — Although  this  business  is  conducted  in  a  build- 
ing it  does  not  necessarily  follow  that  the  proprietor  of  the  busi- 
ness owns  the  building.  The  owner  of  the  property  is  the  one 
who  holds  the  title  to  it,  and  the  title  is  evidenced  by  a  deed— a 
formal  document  transferring  the  title  from  the  former  to  the 
present  owner.  The  deed  should  be  recorded  in  the  official 
records  of  the  county  in  which  the  property  is  located.  The 
owner  of  the  property  may  lease  it  to  someone  else  who  pays  for 
the  right  to  use  it — rent. 

Henry  Martin  holds  the  deed  to  the  store  and  lot  occupied 
by  him  at  236  Main  St.,  Kenton,  Ohio.  By  deducting  from  the 
cost  of  the  property  the  decrease  in  value  through  use,  it  is  now 
found  to  be  worth  $15,000  and  is  so  valued  in  Schedule  No.  9. 
We  indicate  on  this  schedule  that  the  building  has  been  insured 
in  the  Mutual  Fire  Insurance  Company  for  $10,000  for  a  period  of 
3  years  from  August  5,  19 — .  Reference  is  also  made  to  the  fact 
that  a  mortgage  of  $5,000  against  the  property  exists,  and  is 
listed  in  Schedule  No.  13. 

Other  Assets. — Other  assets  should  be  carefully  estimated 
and  listed  in  a  separate  schedule.  The  interest  accrued  on  the 
notes  receivable  and  the  bonds  found  in  Schedules  Nos.  2  and  8  is 
now  collected  in  this  schedule. 

Schedule  No.  10 
Other  Assets 
August  5,  19— 

Interest  Earned  on  Notes  Receivable  (Schedule  2) $2.50 

Interest  Earned  on  Bonds  (Schedule  8) 3.22 


Total $5.72 


48 


FUNDAMENTALS  OF  ACCOUNTING 


Accounts  Payable. — The  record  showing  the  amount  Henry 
Martin  owes  his  creditors  may  be  on  slips  of  paper,  on  cards,  in 
accounts  kept  in  books,  or  in  the  unpaid  invoices.  Even  when 
other  records  are  kept,  the  invoices,  since  they  were  prepared  by 
the  creditors,  are  useful  in  verifying  the  correctness  of  the  other 
records.  Martin  keeps  the  record  of  his  business  debts  in  books. 
To  make  sure  that  the  accounts  are  correct  we  compare  them  with 
the  unpaid  invoices,  and  then  prepare  a  list  of  his  trade  creditors 
as  follows : 

Schedule  No.  1 1 
Accounts  Payable 
August  5,  iQ— 


Name 


Amount 


H.  F.  Sends 

King  and  Cohen 

American  Grocery  Company 
Meyers  and  Company 

Total 


Notes  Payable. — Every  prudent  man  keeps  a  record  of  each 
written  promise  to  pay  money  which  he  has  issued,  showing  the 
date,  to  whom  issued,  amount,  rate  of  interest,  time  or  when  due, 
and  for  what  given.  The  simplest  record  is  kept  in  a  book  of 
blank  forms  of  notes,  perforated  at  the  left  end,  the  stub — i.e., 
the  part  remaining  in  the  book — containing  lines  for  the  informa- 
tion noted  above.  After  a  note  has  been  paid  it  may  be  marked 
"Paid"  and  attached  to  its  stub,  or  the  stub  marked  "Paid" 
and  the  canceled  note  placed  in  the  safe.  Under  another  plan  all 
notes  issued  are  recorded  in  a  book  with  columns  for  the  desired 
information. 


VALUING  ASSETS  AND  LIABILITIES 


49 


Mr.  Martin  has  recorded  his  notes  payable  in  a  book  of  blank 
forms  with  stubs.  We  compare  the  stubs  marked  "Paid"  with 
the  canceled  notes  and  accept  the  other  stubs  as  representing 
the  notes  unpaid.  Martin  might  have  issued  some  notes  and 
forgotten  to  make  a  record  on  the  stubs,  but  this  is  not  likely  if 
all  notes  are  issued  from  one  source,  because  the  unfilled  stubs 
would  call  attention  to  the  matter.  From  the  stubs  we  prepare 
a  list  of  notes  outstanding. 


Schedule  No.  1 2 


Notes  Payable 
August  5,  19 — 


To  Whom  Given 

Date 

Issued 

Time 

Date 
Due 

Face 

Rate  of 
Interest 

Time 
Elapsed 

Accrued 
Interest 

American  Grocery  Co.  . 

19— 
June    5 
July  26 
Aug.    2 

6  mo. 
30  da. 
90  da. 

19— 
Dec.     s 
Aug.  25 
Nov.  30 

$300  - 

420  - 

75- 

6% 
6% 
none 

2  mo. 
10  da. 

3  da. 

13- 
•  70 

*795  - 

S3  70* 

The  amount  of  Notes  Payable  may  be  stated  as  $795  in  the 
statement  of  assets,  liabilities,  and  capital  and  another  item, 
Accrued  Interest  $3.70,  entered  separately,  or  the  two  totals  may 
be  combined  as  Notes  Payable  and  Accrued  Interest,  $798.70. 


Mortgage  Payable. — A  record  of  a  mortgage  on  the  property 
may  or  may  not  be  kept.  Usually  only  one  mortgage  is  given 
in  a  small  business  and  the  proprietor  has  little  difficulty  in  re- 
membering the  item.  To  determine  whether  or  not  a  mortgage 
against  the  property  exists,  one  would  ask  the  proprietor,  or,  bet- 
ter still,  have  a  search  made  of  the  official  records  of  the  county 


*  This  item  is  not  to  be  included  in  the  total  of  this  schedule,  being  shown  here  only  as  a 
matter  of  convenience  in  figuring  the  amount  accrued.     It  appears  in  Schedule  No.  14. 


50  FUNDAMENTALS  OF  ACCOUNTING 

in  which  the  property  is  located.  Martin  informs  us  that  he  owes 
B.  L.  Young  $5,000  on  the  purchase  of  the  building  and  lot  and 
has  given  Young  as  security  a  5-year  mortgage  for  $5,000  at  6%, 
dated  April  5,  1920.  We  list  this  under  Schedule  No.  13  and 
add  a  memorandum,  stating  that  4  months'  interest  at  6%,  $100, 
has  accrued  on  the  mortgage. 

Other  Liabilities. — With  Mr.  Martin's  assistance  we  discover 
additional  liabilities  shown  below.  Items  owed  but  not  yet  due 
are  called  "accrued  liabilities"  or  "accruals."  We  list  here  also 
the  interest  accrued  on  the  notes  payable  and  on  the  mortgage. 


Schedule  No.  14 


Other  Liabilities 
August  5.  19 — 


Interest  accrued  on  notes  payable  (Schedule  12) $    3.70 

Interest  accrued  on  mortgage  payable  (Schedule  13) 100  - 

Clerks'  salaries  owed  but  not  due: 

G.  D.  Jones $20 

B.L.White 15  35" 

Taxes  on  land  and  building  estimated  to  date 90  - 

Repairs  on  delivery  car  owed  to  R.  B.  Black 18  - 

Total $246.70 


Summary  of  Schedules. — It  is  not  necessary  to  prepare 
schedules  in  the  exact  sequence  followed  above.  Another  order 
would  do  equally  well.  For  example,  the  schedule  of  accounts 
payable  might  have  been  prepared  before  that  of  expense  assets. 
We  now  prepare  a  statement  of  assets,  liabilities,  and  capital, 
which  is  merely  a  summary  of  the  various  schedules. 

When  making  a  statement  of  assets,  liabilities,  and  capital, 
it  is  customary  to  arrange  the  items  in  a  definite  order.  In  a 
trading  business  the  assets  which  are  used  in  trading  usually 


VALUING  ASSETS  AND  LIABILITIES  5 1 

appear  first.  Thus,  Cash,  Notes  Receivable,  Accounts  Re- 
ceivable, and  Merchandise  should  be  shown  in  that  order.  Fol- 
lowing these  should  appear  the  Expense  assets  and  the  Furniture 
and  Fixtures,  Buildings,  Land,  etc.  This  arrangement  of  the 
assets  is  in  accordance  with  the  relative  degree  of  liquidity  of  the 
various  items. 


Henry  Martin 

Statement  of  Assets,  Liabilities,  and  Capital 

August  5,  19 — 


Assets: 

Cash (Schedule  1). 

Notes  Receivable (Schedule  2) . 

Accounts  Receivable ....  (Schedule  3) . 

Merchandise (Schedule  4) . 

Other  Assets (Schedule  10) 

Securities (Schedule  8) . 

Expense  Unconsumed .  . .  (Schedule  5) . 
Furniture  and  Fixtures . .  (Schedule  6) . 
Delivery  Equipment ....  (Schedule  7) . 

Real  Estate (Schedule  9) . 

Total  Assets 


Liabilities : 

Accounts  Payable (Schedule  11) 

Notes  Payable (Schedule  1 2) 

Other  Liabilities (Schedule  14) 

Mortgage  Payable (Schedule  13) 

Total  Liabilities . . . 

Capital: 
Invested  by  Henry  Martin 


$1,702.10 

420- 

209.60 

i,937-2S 

5-72 

45°- 
150- 

73°- 

400  - 

15,000- 


1,1,019- 

795- 
246.70 
5,000  - 


$21,004.67 


7.060.70 


$13,943-97 


By  liquidity  is  meant  the  readiness  or  ease  with  which  the 
various  assets  are  converted  into  cash  in  the  regular  course  of 
business.     Cash  is  the  most  liquid;  it  is  ready  without  change  for 


52  FUNDAMENTALS  OF  ACCOUNTING 

any  use.  Notes  and  accounts  receivable  must  be  collected  before 
they  can  ordinarily  be  used,  and  merchandise  must  be  sold  and 
the  money  arising  out  of  its  sale  must  be  collected.  Certain 
assets,  such  as  buildings,-  land,  furniture  and  fixtures,  are  not 
usually  sold  in  the  regular  course  of  trading  and  are  therefore  not 
liquid.     They  are  called  "fixed." 

Since  cash — and  sometimes  other  liquid '  assets — is  used  to 
pay  debts,  it  is  customary  to  arrange  the  liability  items  in  the 
order  of  their  currency.  By  this  is  meant  that  those  liabilities 
which  will  ordinarily  have  to  be  paid  off  by  using  the  cash  and 
other  liquid  assets  should  be  shown  first.  Thus,  Notes  Payable 
and  Accounts  Payable  will  appear  first  in  the  liability  section  of 
the  balance  sheet  and  will  be  followed  by  Mortgage  Payable  and 
other  items  which  will  not  have  to  be  paid  off  within  so  short  a 
period  of  time. 

Hereafter,  in  all  statements  of  assets,  liabilities,  and  capital, 
the  asset  and  liability  items  should  be  arranged  as  explained 
above. 

Questions 

i.  What  is  the  main  purpose  of  valuation  in  a  going  business? 

2.  In  finding  the  amount  of  cash  in  bank  subject  to  check,  why  are 
the  checks  outstanding  deducted  from  the  amount  on  deposit  in  the  bank? 

3.  Hoy/  may  the  value  of  an  interest-bearing  note  receivable  be 
stated  in  the  schedule? 

4.  In  what  different  ways  can  accounts  receivable  be  kept? 

5.  How  would  you  find  the  inventory  of  merchandise  in  a  shoe  store? 
dry-goods  store?  lumber  yard? 

6.  At  what  price  is  the  inventory  of  merchandise  valued?     Why? 

7.  How  are  expense  assets  valued?     Why? 

8.  At  what  price  should  damaged  merchandise  be  inventoried?  Why? 

9.  How  would  you  arrive  at  the  value  of  furniture  and  fixtures  and 
delivery  equipment? 

10.  Does  every  business  man  own  his  place  of  business?     Why? 

11.  (a)  What  do  you  understand  by  securities?  (b)  How  would  you 
value  them? 

12.  Does  fire  insurance  make  a  building  worth  more?     Why? 


VALUING  ASSETS  AND  LIABILITIES  53 

13.  How  can  one  prove  that  he  is  the  owner  of  a  piece  of  real  estate? 

14.  In  what  different  ways  can  accounts  payable  be  kept? 

15.  Why  should  a  record  be  kept  of  notes  payable? 

16.  What  may  a  schedule  of  other  liabilities  contain? 

17.  In  what  order  should  assets  and  liabilities  be  arranged  in  a  state- 
ment of  assets,  liabilities,  and  capital?    Why? 

Problems 

Visit  your  grocery  store  again  and  observe  the  business  for  the  purpose 
of  valuing  its  assets  and  liabilities  as  a  going  concern.  Ask  the  proprietor 
and  other  people  any  questions  that  you  think  will  aid  you. 

1.  Write  a  brief  report,  not  more  than  2  pages,  explaining  your  pur- 
pose in  reporting  on  the  store  and  what  you  did  on  this  visit.  This  is  not 
intended  to  be  a  report  on  the  work  to  be  done  in  preparing  the  various 
schedules,  but  more  to  get  your  ideas  as  to  why  we  want  this  information 
and  what  questions  you  asked  others. 

2.  Explain  in  detail  (orally)  the  procedure  to  be  followed  in  deter- 
mining the  value  of  the  various  groups  of  assets  and  liabilities  in  the  state- 
ment of  Henry  Martin. 

3.  If  possible  obtain  one  or  more  sheets  of  an  actual  inventory,  or  if 
that  cannot  be  done  try  to  secure  one  or  more  of  the  sheets  used  to  record 
articles  inventoried — blank  inventory  sheets. 


CHAPTER  VI 
CAUSES   OF   CHANGES   IN   CAPITAL 

Purpose  of  Chapter. — 

i.  Comparison  of  assets  and  liabilities  at  beginning  and  end 
of  a  period,  and  effect  on  capital. 

2.  Profits,  operating  and  anticipated. 

3.  Expenses,  operating,  non-operating,  and  anticipated. 

4.  Contributions  and  withdrawals  of  assets. 

Comparison.— Comparison  is  used  to  determine  change  in 
financial  condition.  We  have  learned  how  to  determine  the 
assets,  liabilities,  and  capital  of  a  concern  on  a  given  date.  We 
learned  further  that  the  information  so  obtained  is  useful  in 
managing  a  business  enterprise.  More  information,  however, 
can  be  obtained  by  comparing  the  statements  of  assets,  liabilities, 
and  capital  of  the  same  business  for  two  dates,  such  as  December 
31,  19 19,  and  December  31,  1920.  The  most  direct  method  of 
determining  change  in  financial  condition  is  to  find  the  increase 
or  decrease  of  capital  at  the  last  date  over  the  capital  at  the  first 
date.  Thus  A's  capital  at  the  first  date  may  be  $1,000  and  at 
the  last  date  $1,500,  or  an  increase  of  $500. 

Changes  in  Financial  Condition. — The  cause  of  the  change  in 
capital  is  found  in  the  changes  in  assets  and  liabilities.  The  fol- 
lowing examples  will  illustrate  the  manner  in  which  increases  and 
decreases  in  capital  are  brought  about.  In  each  example  the 
financial  condition  of  the  business  at  the  first  date  is  shown,  im- 
mediately followed  by  its  condition  on  the  second  date.  After 
this  is  given  the  result  of  comparison  of  the  two  statements.  A 
graphic  illustration  of  each  is  also  presented. 

54 


CAUSES  OF  CHANGES  IN  CAPITAL 


55 


The  following  changes  in  financial  condition  are  discussed : 
i .  Increase  in  capital 

2.  Decrease  in  capital 

3.  No  change  in  capital 
1.  Increase  in  Capital. — 

Case  1.  Assets  increase  and  liabilities  remain  the  same. 


A 
L 
C 

First  Date 

$5°c 

20c 

$300 

»         A 
L 

1         C 

a[ 

L  | 

c| 

Second  Date 

$600 

200 

$400 

Result 
Increase 
No  change 
Increase 

A 

A  Inc.  [ 

L 

1 

L 

r> 

C  Inc.  [ 

$100 


$100 


Comparing  assets  under  Second  Date  with  assets  under  First 
Date  we  find  an  increase  of  $100,  which  is  stated  under  Result. 
Comparing  liabilities  we  find  no  change,  and  comparing  capital  we 
find  an  increase  of  $100.  The  source  of  the  increase  in  capital  is 
indicated  under  Result :  An  increase  in  assets  of  $100  with  liabilities 
remaining  unchanged  results  in  an  increase  in  capital  of  $100. 

Scale:  In  each  of  the  graphs  every  three-sixteenth  inch  (3/16  inch) 
represents  a  money  value  of  $100. 

Case  2.  Assets  remain  the  same  and  liabilities  decrease. 


A 
L 
C 

First  Date 

$500 

200 

$300 

Second  Date 
A                        $500 
L                          100 
C                       $400 

Re 

No  change 

Decrease 

Increase 

A 

L      Dec. 
C      Inc. 

suit 

$100. 
$100 

A 

1  1   1 

A|      1      1 

• 

*D 

L 

1  1 

1  1 

C 

1   1  1 

c|    1    1 

U 

56 


FUNDAMENTALS  OF  ACCOUNTING 


Case  3.  Assets  increase  and  liabilities  increase  less. 


First  Date 
A  $500 

L  200 

C  $300 

a!  i  1  r 


c[ 


Second  Date 


$700 
300 

$400 


Result 

Increase  $200 

Increase  100 

Increase  $100 

A  Inc.  I      1      I 


L  Inc.  Q 
C  Inc.  Q 


Case  4.  Assets  decrease  and  liabilities  decrease  more. 

Result 


□ 


First  Date 

Second  Date 

A 

$500 

A 

$400 

Decrease 

L 

200 

L 

0 

Decrease 

C 

$300 

C 

$400 

Increase 

A     Dec. 


L     Dec. 


C     Inc. 


□ 


Sioo 

200 

Sioo 


Case  5.  Assets  increase  and  liabilities  decrease. 


First  Date 

A  $500  A 

L  200  L 

C  $300  C 

A 


i[ 


Second  Date 


Result 


$550  Increase 
150  Decrease 
$400  Increase 


A     Inc. 


L     Dec, 


C     Inc. 


D 
D 
□ 


$50 
$100 


CAUSES  OF  CHANGES  IN  CAPITAL 


57 


A 
L 
C 


A 
L 
C 

A 
L 

C 


A 
L 
C 

A 

L 
C 


2.  Decrease  in  Capital. — 

Case  i.  Assets  decrease  and  liabilities  remain  the  same. 
First  Date  Second  Date  Hesult 

$500  A  $400      Decrease  $100 

200  L  200      No  change 

C  $200      Decrease 


$3°° 


$100 


Dec. 


Dec. 


□ 


□ 


Case  2.  Assets  remain  the  same  and  liabilities  increase. 


First  Date 


Second  Date 


$500 

200 

$300 


S500 

300 
$200 


Result 
No  change 

Increase  $100 

Decrease  $100 

A 

L      Inc. 

C      Dec. 


Case  3.  Assets  decrease  and  liabilities  decrease  less. 


First  Date 


$500 

200 

$300 


Second  Date  Result 

A  $300  Decrease 

L  100  Decrease 

C  $200  Decrease 


S200 

100 

$100 


c  FT 


A  Dec.  |_ 
L  Dec.  [ 


58 


FUNDAMENTALS  OF  ACCOUNTING 


Case  4.  Assets  increase  and  liabilities  increase  more. 
First  Date  Second  Date  Result 

A  $500      A  $600  Increase  $100 

L  200      L  400   Increase  200 

$200  Decrease  $100 


$300 

A   Inc. 


L    Inc. 


C  Dec. 


□ 


□ 


Case  5.  Assets  decrease  and  liabilities  increase. 

First  Date  Second  Date  Result 

A  $500        A  $450      Decrease 

L  200        L  250      Increase 


A 
L 
C 

A 


?oo 


$200      Decrease 


A 
L 
C 


Dec 


L     Inc. 


C     Dec. 


$50 

50 

$100 


D 
□ 


3.  No  Change  in  Capital. — 

Case  1.  Assets  and  liabilities  increase  equally. 

First  Date  Second  Date                       Result 

$S°°  A  $600  Increase                 $100 

200  L  300  Increase                    100 

$300  C  $300  No  change 

A      Inc. 


L     Inc. 


□ 


CAUSES  OF  CHANGES  IN  CAPITAL 


50 


Case  2.  Assets  and  liabilities  decrease  equally. 

Second  Date  Result 

A  $300  Decrease 

L  o  Decrease 

C  $300  No  change 

A  r 


First  Date 
A  $500 

L  200 

C 


$200 
200 


A  Dec. 
L  Dec. 
C 


Sources  of  Increases  in  Capital. — Increase  in  capital  does  not 
necessarily  indicate  profit.  It  merely  shows  that  a  change  has 
occurred;  not  how  it  occurred.  To  show  how  changes  in  assets 
will  cause  changes  in  capital  let  us  consider  in  detail  the  case 
where  assets  increase  and  liabilities  remain  the  same. 

An  increase  in  capital  brought  about  by  an  increase  in  assets 
may  be  caused  by:  (1)  operation  of  the  business,  or  (2)  an 
additional  investment  by   the  proprietor. 


1.  Operating  Profits. — An  increase  in  capital  may  result  from 
the  sale  of  an  asset  for  more  than  its  cost.  Suppose  that  mer- 
chandise costing  $100  has  been  sold  for  $125  in  cash.  The  asset, 
merchandise,  has  decreased  $100  and  the  asset,  cash,  has  increased 
$125,  with  a  resulting  increase  of  $25  in  total  assets.  Since  the 
liabilities  remain  unchanged,  capital  has  increased  $25.  This 
increase  is  an  operating  profit  because  it  is  the  result  of  using  the 
assets  to  produce  other  assets  of  greater  value  than  originally 
existed.  It  is  also  called  a  realized  profit  because  nothing  more 
need  be  done  to  secure  the  $25  increase. 

Capital  sometimes  appears  to  increase  when  the  market 
value  of  an  asset  increases.  For  example,  we  may  own  a  piece  of 
land  that  cost  $5,000.  If  the  market  value  increases  to  $7,000, 
there  may  appear  to  be  a  $2,000  increase  in  capital.     This,  how- 


60  FUNDAMENTALS  OF  ACCOUNTING 

ever,  is  not  yet  a  fully  earned  profit.  The  land  must  be  sold  be- 
fore the  profit  can  be  realized.  An  increase  in  capital  brought 
about  merely  by  an  increase  in  value  of  an  asset  is  called  an 
anticipated  profit.  Since  it  is  unrealized  profit,  it  is  best  not  to 
count  it,  and  to  continue  to  value  the  asset  at  its  original  cost. 

2.  Additional  Investment  by  the  Proprietor. — The  proprietor 
may  contribute  additional  cash  or  other  assets,  increasing  the 
assets  while  the  liabilities  remain  the  same,  thus  bringing  about 
an  increase  of  capital.  Such  an  increase  in  capital  is  not  con- 
sidered profit  because  the  increase  is  not  the  result  of  operating 
the  business,  that  is,  using  the  assets  to  produce  more  value  than 
originally  existed.  To  illustrate,  suppose  that  before  any  opera- 
tions occur  the  proprietor  makes  an  additional  investment  of 
$200  in  cash.  The  following  statement  will  show  the  effect  on 
capital. 

Before  After  Result 

A     $500  A     $700  Increase       $200 

L       200  L       200  No  change 


C    $300  C    $500  Increase      $200 

It  is  readily  seen  that  the  present  capital  of  $500  is  composed 
of  two  parts,  one  consisting  of  the  original  investment  of  $300, 
and  the  other  the  $200  additional  investment.  Since  there  has 
been  no  increase  in  capital  from  operations  there  can  be  no  profit. 

Sources  of  Decreases  in  Capital. — Capital  decrease  does  not 
necessarily  mean  a  loss  of  assets  in  the  sense  that  the  word  is  used 
when  we  speak  of  the  loss  of  $5  in  money,  or  the  loss  of  an  unin- 
sured building.  On  pages  57  and  58,  under  the  heading,  "De- 
crease in  Capital,"  it  has  been  shown  that  either  a  decrease  of 
assets  or  an  increase  of  liabilities  will  cause  a  decrease  of  capital. 
Since,  however,  a  capital  decrease  due  solely  to  an  increase  of 
liabilities  is  not  often  met  with,  in  the  present  discussion  only 


CAUSES  OF  CHANGES  IN  CAPITAL  6l 

decrease  in  capital  caused  by  a  decrease  of  assets  will  be  con- 
sidered. This  usually  results  from:  (i)  a  consumption  of  assets 
in  operating  the  business,  or  (2)  a  withdrawal  of  assets  by  the 
proprietor. 

1.  Consumption  of  Assets  in  Operation. — In  every  going  con- 
cern expense  assets,  such  as  rent,  insurance,  clerks'  services, 
postage  stamps,  wrapping  paper,  fuel,  stationery,  etc.,  are  con- 
sumed. The  right  to  use  a  room  or  building  for  carrying  on  the 
business  for  a  period — month  or  year — is  given  in  exchange  for 
the  asset,  cash.  Day  by  day  this  right  decreases,  thus  decreasing 
the  expense  asset,  rent  (the  right  to  use  the  building),  and  de- 
creasing capital  in  much  the  same  manner  as  when  the  asset, 
paper,  is  used  to  wrap  an  article  sold  to  a  customer. 

Expense  assets  consumed  in  the  effort  to  increase  total  assets 
are  known  as  operating  expenses.  Among  the  operating  ex- 
penses of  some  firms  will  be  found  thousands  of  dollars'  worth 
of  advertising  consumed  in  an  effort  to  increase  their  capital  by 
making  large  sales  at  a  profit.  These  profits  must  exceed  all 
operating  expenses,  else  a  loss  results,  because  the  new  assets 
acquired  are  less  than  the  expense  assets  consumed  and  the  cost 
of  the  merchandise  assets  sold. 

(a)  Operating  Expenses. — Since  the  chief  function  of  a  trad- 
ing business  is  the  buying  and  selling  of  merchandise,  the  operat- 
ing expenses  of  such  a  business  are  chiefly  those  concerned  with: 
(1)  acquiring  merchandise,  and  (2)  disposing  of  it.  The  usual 
point  of  separation  between  these  two  groups  of  expenses  is  at  the 
place  where  the  goods  are  ready  to  be  sold  to  the  customer.  All 
assets  used  in  the  purchase  of  merchandise  comprise  the  cost  of 
the  merchandise.  Thus  if  the  price  of  the  merchandise  bought  is 
$100  and  $10  is  paid  for  freight  and  $2  for  cartage,  the  cost  of  the 
merchandise  is  not  $100,  but  $112.  The  $12  comprises  the  cost 
of  acquiring  the  merchandise  and  is  included  as  a  part  of  the  cost 
of  the  merchandise.    All  expense  assets  consumed  in  disposing 


62  FUNDAMENTALS  OF  ACCOUNTING 

of  merchandise  are  called  outgoing  expenses.  Outgoing  expenses 
begin  therefore  when  the  effort  to  sell  begins;  in  other  words, 
outgoing  expenses  begin  after  incoming  expenses  have  ceased. 

Outgoing  expenses  are  not  treated  as  a  part  of  the  cost  of 
merchandise,  but  are  deducted  from  the  difference  between  the 
sales  price  and  the  total  cost  price  of  the  merchandise  when  sold. 
This  difference  between  sales  and  cost  price  of  merchandise  sold 
is  called  gross  profit.  If  the  merchandise  in  the  above  example 
is  sold  for  $150  cash  and  the  expense  assets  consumed  in  making 
the  sale  and  operating  the  business  amount  to  $15  for  salesmen's 
salaries,  rent,  light,  heat,  paper,  advertising,  insurance,  etc.,  the 
net  result  of  the  transaction  would  be  indicated  in  this  manner: 

Increase  in  asset,  cash $150 

Less:  Decrease  in  asset,  merchandise 112 

Equals  gross  increase  in  assets  subject  to  reduction $  38 

Less:  Expense  assets  consumed 15 

Equals  net  increase  in  assets $  23 

This  net  increase  in  assets  of  $23  must  bring  about  a  like  in- 
crease in  capital. 

The  net  result  would  be  the  same  if  the  outgoing  expenses  of 
$15  had  been  added  to  the  $112  of  merchandise  cost  and  this 
amount,  $127,  subtracted  from  the  sales  price  of  $150,  leaving  a 
remainder  of  $23.  If  it  were  possible  in  actual  business  to  deter- 
mine as  each  sale  is  made  just  exactly  what  proportion  of  the 
outgoing  expenses — salesman's  salary,  rent,  advertising,  etc. — is 
applicable  to  that  sale,  the  net  result  could  be  determined  by 
adding  these  expenses  to  the  cost  of  the  merchandise  sold.  But 
where  sales  are  being  made  constantly,  it  is  impossible  to  appor- 
tion the  outgoing  expenses  to  each  sale.  Accordingly,  it  is  the 
practice  to  add  all  incoming  expenses  wherever  possible  to  the 
cost  of  merchandise,  but  to  subtract  outgoing  expenses  from 
the  gross  profit. 

In  a  small  business  it  is  not  always  easy  to  separate  all  incom- 
ing and  outgoing  expenses.     Thus  a  clerk  may  spend  part  of  his 


CAUSES  OF  CHANGES  IN  CAPITAL  63 

time  in  connection  with  buying  goods  and  part  in  disposing  of 
them.  Where  separation  of  the  time  is  difficult,  the  entire  ex- 
pense is  usually  listed  with  the  outgoing  expenses.  Incoming  ex- 
penses are  incurred  whenever  goods  are  bought;  the  merchant 
cannot  escape  them.  If  he  buys  merchandise,  he  must  pay  all 
costs  to  get  it  into  his  possession.  Over  outgoing  expenses,  how- 
ever, he  has  a  closer  control.  If  he  does  not  desire  to  spend 
money  (cash)  for  advertising  he  does  not  have  to.  If  salesmen's 
salaries  are  costing  too  much  he  may  dismiss  some  of  his  salesmen. 
If  rent  is  too  high  he  may  move  to  less  expensive  quarters.  About 
all  of  these  things  he  must  exercise  his  judgment.  If  these  oper- 
ating expenses  result  in  profits  in  excess  of  what  he  could  make 
without  incurring  them,  good  business  judgment  dictates  that 
lie  should  not  attempt  to  cut  down  his  expenses.  Outgoing 
expenses  must  always  be  measured  against  the  gross  increase  in 
capital  which  they  produce. 

If  merchandise  has  been  damaged  in  handling,  gone  out  of 
style,  become  shelf-worn,  or  if  prices  have  decreased,  it  may  be 
necessary  to  sell  the  merchandise  below  cost.  This  will  result  in 
a  decrease  in  capital.  Thus,  if  goods  costing  $50  are  sold  for  $40 
in  cash,  the  asset,  merchandise,  has  been  decreased  $50  and  the 
asset,  cash,  has  been  increased  $40.  As  a  result  there  is  $10  less 
in  total  assets,  and  since  liabilities  have  not  changed,  there  is  also 
a  net  decrease  in  capital  of  $10.  This  may  be  considered  as  a 
bonus  to  induce  the  customer  to  take  the  goods.  Hence  it  is  an 
operating  expense. 

Sometimes  a  merchant  offers  old  stock  at  less  than  cost  to 
dispose  of  it  quickly  and  make  room  for  new  stock.  Again  it  is 
often  advisable  to  sell  goods  at  a  little  under  cost  at  once  rather 
than  chance  a  further  decline  in  market  value  and  a  greater  loss 
at  a  future  date.  All  such  sales  are  a  matter  of  business  policy 
and  therefore  these  losses  are  operating  expenses. 

(b)  Non-Operating  Losses. — When  a  concern  loses  cash  or 
other  assets  through  burglary,  theft,  or  accident,  it  is  considered 


64  FUNDAMENTALS  OF  ACCOUNTING 

a  non-operating  loss  or  expense.  The  loss  of  a  sum  of  money  on 
the  street,  the  partial  or  complete  destruction  of  an  uninsured 
building,  the  loss  of  merchandise  or  cash  through  theft  or 
burglary,  are  examples.  As  these  do  not  occur  under  normal 
conditions  they  are  not  operating  expenses.  They  nevertheless 
reduce  assets,  and  since  liabilities  are  not  affected,  there  is  a  reduc- 
tion in  capital.  As  they  are  unexpected  losses,  they  ought  not 
to  be  included  with  the  regular  and  usual  expenses  incidental  to 
the  normal  operations  of  the  business.  They  do  not  in  any  sense 
bring  in  new  customers  or  increase  the  sales  to  old  customers. 

(c)  Anticipated  Losses. — Just  as  a  profit  may  be  anticipated 
(see  page  60)  so  may  a  loss  be  anticipated.  The  market  value 
of  an  asset  may  decrease.  This  loss  has  not  been  the  result  of 
operating  the  business,  but  has  been  due  to  changes  in  the  market. 
Except  in  the  case  of  merchandise,  changes  in  the  market  should 
not  be  allowed  to  make  any  change  in  the  valuation  of  an  asset. 
The  furniture  and  fixtures,  the  delivery  equipment,  etc.,  of  a 
going  business  are  not  for  sale;  the  business  needs  them  for  oper- 
ating. If  they  decrease  in  market  value,  it  makes  little  or  no 
difference  to  the  owner  because  he  does  not  expect  to  sell  them ; 
he  will  continue  to  use  them.  Hence  he  will  not  sustain  a  loss 
arising  from  a  change  in  the  market. 

Because  the  loss  is  not  sustained,  the  asset  will  continue  to  be 
valued  at  its  original  cost  less  the  value  of  the  portion  used  up 
or  worn  out  in  operating  the  business. 

Since  merchandise,  however,  is  acquired  only  for  resale,  it  is 
valued  at  market  when  market  price  is  lower  than  cost  price. 
While  this  actually  anticipates  the  loss— i.e.,  considers  it  as  hav- 
ing happened  before  the  sale  was  made  and  the  loss  actually 
sustained— it  is  justified  on  the  ground  of  conservative  business 
practice  which  recognizes  all  losses  likely  to  occur  and  makes 
provision  for  them.  It  is  not  considered  good  practice,  however, 
to  anticipate  profits  on  unsold  merchandise  when  the  market 
price  is  higher  than  the  cost  price.    A  business  man  always 


CAUSES  OF  CHANGES  IN  CAPITAL  65 

prefers  to  be  on  the  safe  side  and  not  to  count  his  profits  until 
his  goods  are  sold,  but  to  make  adequate  provision  for  all  losses 
which  he  may  have  to  face  in  the  future. 

2.  Assets  Withdrawn  by  the  Proprietor. — Withdrawal  of 
cash  or  other  assets  by  the  proprietor  for  his  personal  use  results 
in  a  decrease  in  capital.  This  is  in  no  sense  a  loss,  because  it 
consists  merely  in  the  transfer  of  assets  belonging  to  the  propri- 
etor. Let  the  proprietor's  business  condition  be  as  represented  by 
the  first  example  below.  He  withdraws  $100  in  cash.  This  will 
decrease  the  assets  from  $500  to  $400  without  changing  the  lia- 
bilities. His  capital  must  therefore  be  $100  less  than  it  was. 
The  change  in  capital  is  fully  explained  by  the  decrease  in  assets 
from  $500  to  $400  due  to  the  proprietor's  withdrawal.  This 
decrease  in  capital  has  not  resulted  from  conducting  the  business, 
hence  no  loss  has  occurred,  i.e.,  the  proprietor, personally,  still  has 
the  same  total  amount  in  assets,  but  not  so  much  of  them  is 
invested  in  this  particular  business. 

Before  After  Result 

A    $500  A    $400  Decrease       $100 

L       200  L       200  No  change 

C    $300  •  C    $200  Decrease       $100 


Questions 

1.  What  is  the  purpose  of  comparing  statements  of  assets,  liabilities, 
and  capital? 

2.  What  is  the  most  direct  method  of  determining  a  change  in  the 
financial  condition  of  an  enterprise? 

3.  What  causes  the  change  in  capital? 

4.  Illustrate  and  explain  five  changes  in  assets  and  liabilities  that  will 
result  in  an  increase  in  capital. 

5.  Illustrate  and  explain  five  changes  in  assets  and  liabilities  that  will 
result  in  a  decrease  in  capital. 

6.  Illustrate  and  explain  two  changes  in  assets  and  liabilities  that  will 
result  in  no  change  in  capital. 


66  FUNDAMENTALS  OF  ACCOUNTING 

7.  Name  the  two  usual  sources  of  increase  in  capital  caused  by  in- 
crease of  assets. 

8.  Does  an  increase  in  capital  always  indicate  a  profit?     Explain. 

9.  What  is  meant  by  "profits  from  operation"? 

10.  What  is  meant  by  "anticipating  profits"?     Illustrate. 

11.  Prove  that  an  additional  investment  by  the  proprietor  is  not  profit. 

12.  Name  the  two  usual  sources  of  decrease  in  capital  caused  by  de- 
crease of  assets. 

13.  Why  are  freight  and  other  incoming  expenses  added  to  the  cost  of 
merchandise  bought? 

14.  What  is  meant  by  "operating  expenses"?  Are  they  losses? 
Explain. 

15.  Name  the  two  main  groups  of  operating  expenses. 

16.  At  what  point  do  outgoing  expenses  begin?     Illustrate. 

17.  What  do  you  understand  by  gross  profit?     Illustrate. 

18.  Why  should  outgoing  expenses  be  deducted  from  gross  profit 
rather  than  be  added  to  the  cost  of  merchandise? 

19.  Are  incoming  and  outgoing  expenses  always  separated?    Explain. 

20.  Explain  the  effect  on  capital  of  the  sale  of  merchandise  at  less  than 
cost. 

ai.  What  is  a  "non-operating  loss"?     Give  four  examples. 

22.  What  is  an  "anticipated  loss  or  expense"?     Illustrate. 

23.  Why  is  unsold  merchandise  valued  at  market  price  when  market 
price  is  less  than  cost? 

24.  Why  is  unsold  merchandise  valued  at  cost  price  when  market  price 
is  higher  than  cost? 

25.  Show  why  a  decrease  in  capital  caused  by  the  withdrawal  of  assets 
by  the  proprietor  for  his  personal  use  is  not  a  loss. 

Problems 

Note:  In  solving  Problems  1  to  14  inclusive,  arrange  your  solutions 
according  to  the  forms  shown  on  pages  55  to  59.  Do  not  forget  to  make 
a  graphic  solution  just  beneath  the  numerical  solution. 

1.  On  December  31,  191 9,  John  Davis  had  assets  of  $1,000;  liabilities 
of  $200;  capital  $800.  During  the  following  year  his  assets  increased  $200; 
liabilities  remained  the  same.    What  was  his  capital  on  December  31, 1920? 

2.  On  December  31,  191 9,  James  Harrigan  had  assets  of  $1,200; 
liabilities  of  $500;   capital  $700.    During  the  year  1920  his  liabilities  de- 
creased $100;  his  assets  remained  the  same.    What  was  his  capital  Decern 
ber^i,  1920? 


CAUSES  OF  CHANGES  IN  CAPITAL  67 

3.  On  June  30,  1919,  Harry  Fish  had  assets  of  $600;  liabilities  of  $100; 
capital  $500.  On  June  30,  1920,  his  assets  were  $650;  liabilities  $125. 
What  was  his  capital? 

4.  On  June  30,  1920,  Marie  Terrott  had  assets  of  $700;  liabilities  of 
$300;  capital  $400.  During  the  following  year  her  assets  decreased  $25; 
liabilities  decreased  $50.    What  was  her  capital  June  30,  1921? 

5.  On  March  1,  191 9,  William  Horn  had  assets  of  $800;  liabilities  of 
$350;  capital  $450.  On  March  1,  1920,  his  assets  amounted  to  $850, 
liabilities  $325.    What  change  was  made  in  his  capital? 

6.  On  July  1,  1921,  Emma  Clark  had  cash  of  $100  and  owed  to  her 
mother  $25.  On  August  1  she  had  cash  of  only  $95,  and  still  owed  her 
mother  $25.    What  was  the  difference  in  her  capital? 

7.  You  prepared  a  statement  for  George  Cass  showing  his  assets  to 
be  $500;  liabilities  $100;  capital  $400.  The  next  day  he  advised  you  he 
owed  $25  more  than  was  included  in  his  statement.  What  was  his  correct 
capital? 

8.  On  October  31,  Frank  Simons  had  assets  of  $600;  liabilities  of  $200; 
capital  $400.  On  December  31  of  the  same  year  his  assets  amounted  to 
$500;  liabilities  of  $1 75.    What  was  the  decrease  in  his  capital? 

9.  During  a  certain  year,  J.  L.  Julian's  assets  increased  from  $1,000 
to  $1,050,  while  his  liabilities  increased  from  $500  to  $600.  What  differ- 
ence was  made  in  his  capital? 

10.  During  the  year  of  1920  Ed.  Friend's  assets  decreased  $50,  and  his 
liabilities  increased  $200.  At  the  end  of  the  year  he  had  assets  of  $750  and 
liabilities  of  $500.    What  was  his  capital  at  the  beginning  of  the  year? 

11.  On  December  31,  1920,  you  prepared  a  statement  for  James  Day 
showing  his  assets  to  be  $600  and  liabilities  $100.  At  the  end  of  the  follow- 
ing year  you  found  that  his  assets  had  increased  $100  and  his  liabilities 
had  also  increased  $100.     What  was  his  capital  at  the  end  of  the  year? 

12.  On  May  1,  Mary  Haskins  had  assets  of  $90;  liabilities  of  $30;  capi- 
tal $60.  On  June  1  of  the  same  year  she  found  that  her  assets  had  de- 
creased $10  and  that  she  had  liabilities  of  only  $20.  What  was  her  capital 
on  June  1? 

13.  Dallas  Lawrence  had,  on  February  1,  1921,  assets  amounting  to 
$600;  liabilities  of  $200;  capital  $400.  During  the  month  he  lost  on  the 
street  $5  and  had  another  $5  stolen  from  him.  At  the  end  of  the  month 
he  still  had  liabilities  of  $200.    What  was  his  capital? 

14.  Jack  Breeze  had  assets  on  August  1,  of  $200  and  he  had  no  liabili- 
ties. During  the  month  his  mother  gave  him  $20  for  a  birthday  present. 
He  had  a  watch  repaired  by  James  Horn  for  which  he  was  charged  $5. 
On  September  1,  he  had  not  yet  paid  Mr.  Horn,  but  he  had  no  other 


68  FUNDAMENTALS  OF  ACCOUNTING 

liabilities  or  assets  except  as  mentioned  above.     What  was  his  capital  on 
September  i? 

15.  A  proprietor  sold  merchandise  for  $2,000  that  cost  him  $1,500. 
What  kind  of  profit  is  the  $500  increase  in  assets? 

16.  A  proprietor  sold  merchandise  for  $750  that  cost  him  $500.  What 
does  the  $250  increase  in  assets  represent? 

17.  A  proprietor  made  an  additional  investment  of  $1,000.  Does  it 
represent  a  profit  to  the  business?    How  does  it  affect  the  capital? 

18.  A  building  worth  $10,000  at  the  beginning  of  the  year  is  valued  at 
$11,000  at  the  end  of  the  year.  What  would  you  call  the  difference  of 
$1,000? 

19.  A  piece  of  land  that  cost  $8,000  was  at  the  end  of  5  years  valued  at 
$10,000.  Did  the  owner  realize  a  profit?  At  what  figure  should  he  list 
the  land  among  his  assets? 

20.  What  kind  of  assets  are  such  items  as  rent,  insurance,  postage,  and 
clerks'  services? 

21.  A  merchant  bought  merchandise  for  $200  and  paid  freight  on  it  of 
$4.  What  assets  did  he  receive?  He  sold  the  merchandise  for  $250. 
What  was  his  profit? 

22.  A  merchant  bought  merchandise  for  $500.  He  paid  $10  freight  on 
it  and  his  salesman's  salary  and  expenses  while  selling  it  was  $25.  The 
merchandise  was  sold  for  $700.  What  was  the  gross  increase  in  assets? 
The  net  increase?    What  was  the  net  effect  on  his  capital? 

23.  Explain  the  nature  of  the  following  items:  freight  on  incoming 
merchandise;  rent  of  building;  freight  on  merchandise  sold;  advertising; 
charges  for  hauling  incoming  merchandise  from  freight  office  to  storeroom. 

24.  A  merchant  sold  merchandise  for  $200  that  cost  $250. 

(a)  Did  this  transaction  result  in  an  increase  or  decrease  in  capital? 

(b)  How  would  you  proceed  to  prove  this? 

25.  A  proprietor  who  had  $1 2,000  invested  in  business  withdrew  $2,000. 
Does  the  $2,000  represent  an  expense?  What  effect  does  the  withdrawal 
have  upon  the  capital?    Why? 

26.  A  proprietor  lost  $500  through  burglary.  What  kind  of  loss  does  it 
represent? 

27.  A  stock  of  merchandise  cost  $2,000.  Before  it  was  sold  the  market 
price  was  $1,800.  What  kind  of  loss  does  the  $200  represent?  At  what 
figure  should  the  merchandise  be  listed  among  the  assets?     Why? 

28.  Furniture  and  fixtures  were  purchased  for  $1,200.  At  the  end  of 
the  year  they  are  worth  only  $1,000.  What  does  the  difference  represent? 
What  is  the  difference  between  this  decrease  and  the  decrease  in  Problem 
27? 


CHAPTER   VII 

COMPARATIVE   STATEMENTS   OF  FINANCIAL 
CONDITION 


Purpose  of  Chapter. — 

i .  Purpose  of  comparative  financial  statements. 

2.  Changes  in  individual  assets  and  liabilities. 

3.  Result,  not  cause,  of  changes  shown. 

Form  of  the  Comparative  Statement. — The  following  state- 
ment shows  the  financial  condition  of  Henry  Brown  as  of  De- 
cember 31,  191 9,  and  December  31,  1920,  in  comparative  form: 

Henry  Brown 

Comparative  Statement  of  Assets,  Liabilities,  and  Capital 

December  31,  1919,  and  December  31,  1920 


Assets: 

Cash 

Dec.  31. 
1920 

Dec.  31, 
ioiq 

Increase 

Decrease 

Net  Inc. 
Net  Dec. 

$      700- 

6,000  - 

2,500- 

10,000  - 

200  - 

1,200  - 

12,000  - 

$  1,500- 
4,000  - 
2,000  - 
8.000  - 

$2,000  - 

500  - 

2,000  - 

200  - 

2,000  - 

$800  - 
100  - 

Accounts  Receivable  . . 
Notes  Receivable 

Expense  Assets 

Furniture  &  Fixtures. . 

300  - 

1,000  - 

10,000  - 

Total 

$32,600  - 

$26,800  - 

$6,700  - 

$900  - 

$5,800  - 

Liabilities: 

Accounts  Payable 

Notes  Payable 

Mortgage  Payable .... 

Total 

$  4,000  - 
2,000  - 
2,000  - 

$  5,000  - 
1,000  - 
5,ooo  - 

$1,000- 

$1,000  - 
3.000  - 

$  8,000- 

$11,000  - 

$1,000  - 

$4,000  - 

Capital : 

$24,600- 

$15,800- 

Net  incr< 

.ase  in  cap 

ital 

$8,800- 

69 


70  FUNDAMENTALS  OP  ACCOUNTING 

Summary  of  Increases  and  Decreases 

Asset  increases 06.700  - 

Asset  decreases 9°°  ~ 

Net  increase  in  assets $5<o°°  ~ 

Liability  decreases $4,000  - 

Liability  increases T  -000  ~ 

Net  decrease  in  liabilities 3,000  - 

Increase  in  capital $8,800  - 

Instead  of  using  two  columns  for  changes  in  assets  and  lia- 
bilities, one  column  may  be  used  by  heading  it  "Increase  and 
Decrease"  and  writing  increases  in  black  and  decreases  in  red. 
The  column  may  also  be  headed 

Increase   + 
Decrease  — 

requiring  only  one  color,  each  amount  being  preceded  or  followed 
by  the  sign  +  or  —  to  indicate  increase  or  decrease.  The  total 
and  net  increases  should  be  stated  no  matter  which  form  is 
used. 

Comparing  Totals. — The  increase  in  capital  of  S8,8oo  occurred 
through  increase  in  assets  of  $5,800,  and  decrease  in  liabilities  ol 
$3,000.  In  Chapter  VI,  page  56,  under  the  heading  "Increase 
in  Capital"  it  is  shown  that  the  effects  on  capital  of  a  decrease  in 
liabilities  and  of  an  increase  in  assets  are  the  same.  Therefore, 
the  $3,000  decrease  in  liabilities  must  be  added  to  the  $5,800 
increase  in  assets  to  show  the  change  in  capital.  If  assets  and 
liabilities  have  been  valued  properly  and  if  the  proprietor  has 
neither  made  additional  investments  nor  withdrawn  capital,  the 
increase  of  $8,800  in  capital  represents  net  profit. 

The  changes  in  assets,  liabilities,  and  capital  may  be  stated 
as  follows: 


COMPARATIVE  STATEMENTS  7* 

Increase  in  assets $  6,700  - 

Plus  decrease  in  liabilities 4,000  - 

Has  the  effect  of  increasing  capital $10,700  - 

Decrease  in  assets $    900  - 

Plus  increase  in  liabilities 1 ,000  - 

Has  the  effect  of  decreasing  capital 1,900  - 

Difference  shows  net  increase  in  capital $  8,800  - 


The  comparative  statement  gives  no  information  as  to  pro- 
prietor's investments  and  withdrawals.  Therefore  we  cannot 
tell  if  the  increase  in  capital  of  $8,800  has  been  earned  from 
operations  or  not.  If  Brown  has  contributed  assets  during  the 
year,  the  amount  so  contributed  must  be  deducted  from  the 
$8,800,  and  if  he  has  withdrawn  assets,  the  amount  so  withdrawn 
must  be  added  to  the  $8,800  to  determine  the  change  in  capital 
due  to  operations. 

Form  1  (a)  shows  Henry  Brown's  comparative  financial 
condition  graphically. 

Form  i(b)  shows  a  comparative  graph  of  assets,  liabilities, 
and  capital. 

Comparing  Individual  Assets  and  Liabilities. — The  amount  of 
increase  or  decrease  in  individual  assets  and  liabilities  during  a 
period  of  time  measures  the  net  change  between  present  and 
former  condition  of  each  item.  It  does  not,  however,  show  the 
cause  of  the  change.  Information  of  value  in  managing  the 
business  is  thus  not  available. 

The  decrease  of  $800  in  Cash  in  the  Brown  example  shows  the 
difference  in  condition  of  this  asset,  but  it  does  not  show  what 
caused  the  change — it  does  not  show  the  total  cash  received  and 
what  brought  it  in,  nor  the  total  cash  disposed  of  and  for  what  it 
was  paid.  Accounts  Receivable  and  Notes  Receivable  both 
show  increases,  but  additional  information  is  necessary  to  know 
the  cause.     Merchandise  affords  no  figures  for  purchases  or  sales 


72 


FUNDAMENTALS  OF  ACCOUNTING 


Cash 

$700 


Ac- 
counts 
Receiv- 
able 
$6,000 


Notes 
Receiv- 
able 
$2,500 


Mer: 
chandise 
$10,000 


Expense 
$200-^ 
Furni- 
ture & 

Fixtures 
$1,200 


Real 
Estate 
$12,000 


— 


Ac- 
counts 
Pay- 
able 
$4,000 
Notes 
Pay- 
able 

$2,000 

Mort. 
Pay- 
able 


»     ,    $2,000^ 

$32,600  $8,000  $24,600 

LA l      tf  T:  I 

December  31,  1920 


Cash 
$1,500 

Ac- 
counts 
Receiv- 
able 
$4,000 

Notes 
Receiv- 
able 
$2,000 


Mer: 

chandise 

$8,000 


Expense 
$300"* 
Furni-/, 
ture  & 

Fixtures 
$1,000 


Real 

Estate 
$10,000 


S.S\\\\ 


$26,800 

I  A 


$15,800 

_ki I 


December  31,  191 9 


Form  1. 


Henry  Brown 
(a)  Graph  of  Comparative  Financial  Condition 

Scale:  $6,000  per  inch 


COMPARATIVE  STATEMENTS 


73 


> 

o 


1313. 


2*& 


o 

H  1920 


r-O-CK. 

en  m 

^>   H 

0  11 

0 

0 

8 

M 

n 

</> 

M 

Q 

W 

,0 

ad 

hJ 

■ 1 

<r. 

0 

H 

1919 

Ooo 


S3  o 


o 


8 

CO 
in 


'Sj 

d 

U 


Assets 


Liabilities 


1 9201  11919 

Capital 


Henry  Brown 

Form  1.     (b)  Comparative  Graph  of  Total  Assets,  Liabilities,  and  Capital 

Scale:  $6,000  per  inch 


74  FUNDAMENTALS  OF  ACCOUNTING 


Strmmary 

Increase  of  Assets $5)8°° 

Decrease  of  Liabilities •3:°°° 

Increase  of  Capital $8,8oo  equals 


Dec.  of 


Inc.  of  Assets    _L  ^ ^b 
S  •: , 8oo i  $3,ood 


Increase  of  Capital 

$8,8oo 


of  this  asset.  Accordingly,  one  cannot  determine  what  profit,  if 
any,  has  been  made  from  dealing  in  merchandise  unless  additional 
data  are  given.  Expense  assets  indicate  that  the  proprietor  owns 
Sioo  less  of  these  than  the  year  before,  but  tell  nothing  as  to  the 
amount  consumed  during  the  year.  In  the  case  of  Furniture 
and  Fixtures  there  is  nothing  to  indicate  how  much  has  been 
consumed  and  whether  or  not  any  part  has  been  sold.  In  Real 
Estate  there  has  been  an  increase  of  $2,000,  but  this  does  not 
necessarily  mean  that  the  old  property  was  improved  to  the 
extent  of  $2,000.  Perhaps  all  the  19 19  real  estate  has  been  sold 
and  new  real  estate  purchased  for  $12,000.  A  large  profit  or  a 
loss  may  have  been  made  on  the  sale  of  the  old  real  estate.  This 
information  cannot  be  obtained  from  the  statement.  Some  other 
means  for  obtaining  it  must  be  provided. 

The  schedules  1919  and  1920  of  the  liabilities,  Accounts  Pay- 
able, Notes  Payable,  and  Mortgage  Payable,  show  what  each  con- 
sisted of,  but  do  not  show  all  the  changes  that  took  place  during 
the  year. 

Need  for  Additional  Information. — In  Chapter  VI  we  learned 
that  changes  in  capital  result  from  changes  in  assets  or  liabilities, 
or  both.  Since  a  change  in  any  asset  or  liability  may  affect 
capital,  it  is  advisable  to  record  all  changes  as  they  occur, 
and  indicate  the  exact  nature  of  the  transactions  bringing 
them  about.  The  comparative  financial  statement  fails  to 
give  this  information,  which  is  invaluable  to  a  proprietor,  and 
it  must  be  secured.  The  best  method  of  collecting  and  record- 
ing this  additional  information  is  presented  in  the  chapters  which 
follow. 


COMPARATIVE  STATEMENTS  75 

Questions 

i.  What  is  the  purpose  of  a  comparative  statement? 

2.  What  form  for  a  comparative  statement  do  you  prefer?  Illustrate 
the  form.     Why  do  you  prefer  this  form? 

3.  Why  must  net  increases  in  assets  and  net  decreases  in  liabilities 
be  added  to  find  increase  in  capital? 

4.  In  what  other  way  may  the  effect  on  capital  be  stated?    Illustrate. 

5.  What  information  cannot  be  obtained  from  the  statement  of  Henry 
Brown?     Why? 

6.  Would  a  schedule  showing  what  each  asset  and  liability  consists  of 
give  you  the  desired  information? 

7.  How  would  you  obtain  the  additional  information? 

8.  Under  which  one  of  the  five  cases  in  Chapter  VI  showing  increase 
in  capital  would  you  classify  the  comparative  statement  of  Henry  Brown 
on  page  69? 

9.  Explain  the  probable  cause  of  increase  or  decrease  in  each  of  the 
several  assets  and  liabilities  in  Henry  Brown's  statement. 

10.  Refer  to  Henry  Brown's  statement  on  page  69.  Assume  that 
he  contributed  $3,000  in  cash  during  the  year  as  an  additional  investment. 
Find  the  net  profit. 

11.  Assume  that  Brown  did  not  make  an  additional  investment  but 
withdrew  $2,000  for  personal  use.     Find  the  net  profit. 

12.  Find  the  profit  if  Brown  invested  $4,000  and  withdrew  $3,200 
during  the  year. 

Problems 

Note. — From  the  information  furnished  in  each  of  the  following 
problems : 

(a)  Prepare  a  comparative  statement  of  assets,  liabilities,  and  capital. 

(b)  Prepare  bar  graphs  showing  the  amount  of  the  several  classes  of 
assets  and  liabilities  for  each  date. 

(c)  State  which  of  the  twelve  possible  changes  in  assets  and  liabilities 
each  problem  represents.    (See  Chapter  VI.) 

1.  On  June  30,  1920,  John  Kelly  had  $2,000  in  cash;  merchandise,  $7,- 
000;  and  other  assets  of  $8,000.  He  owed  on  account  $1,700;  and  on  other 
liabilities  $2,300.  June  30, 1921,  his  cash  was  $1,400;  merchandise,  $6,000; 
and  other  assets  $11,000.  He  owed  on  account  $1,800;  and  on  other 
liabilities  $2,000. 


76  FUNDAMENTALS  OF  ACCOUNTING 

Compare  your  statement   with  Henry  Brown's  statement  on  page 

69. 

2.  March  31,  1921,  Charles  Stevens  had  cash  $1,200;  accounts  receiv- 
able $1,700;  merchandise  $4,000;  and  other  assets  $8,000.  He  owed,  on 
account,  $2,000;  and  on  notes  $1,500.  One  month  later,  April  30,  1921, 
his  cash  was  $1,000;  accounts  receivable  $1,800;  merchandise  $5,000; 
and  other  assets  $6,000.  He  owed,  on  account,  $1,000;  and  on  notes 
$1,100. 

3.  December  31,  1920,  William  Maxwell's  financial  condition  was  as 
follows:  cash  $2,000;  accounts  payable  $3,000;  merchandise  $6,000;  notes 
payable  $2,500;  accounts  receivable  $2,800;  expense  items  unconsumed 
$125:  rent  paid  in  advance  $300;  furniture  and  fixtures  $1,000.  Six 
months  later,  June  30,  1921,  an  investigation  of  his  financial  condition 
disclosed  these  facts:  merchandise  $7,500;  accounts  payable  $4,000;  notes 
receivable  $1,000;  cash  $1,700;  notes  payable  $1,500;  unconsumed  expense 
items  $75;  accounts  receivable  $3,000;  furniture  and  fixtures  $900. 

4.  On  September  30, 1921,  Silas  Webb's  assets  and  liabilities  were:  cash 
$1,740;  merchandise  $6,200;  accounts  receivable  $2,200;  accounts  payable 
$2,400;  notes  receivable  $3,000;  notes  payable  $2,500;  unconsumed  ex- 
pense items  $150;  real  estate  $14,000,  against  which  there  was  a  mortgage 
payable  of  $6,000;  furniture  and  fixtures  $1,200.  At  the  close  of  the  pre- 
ceding year,  September  30,  1920,  his  assets  and  liabilities  were:  merchan- 
dise $5,700;  accounts  payable  $2,100;  accounts  receivable  $2,900;  cash 
$1,910;  notes  payable  $2,000;  expense  items  on  hand  $100;  real  estate 
$4,000;  furniture  and  fixtures  $1,000. 

5.  The  following  statements  show  the  financial  condition  of  James  W. 
McCarty  on  the  dates  indicated. 

April  30,  192 1 


Assets : 

Cash $1,000- 

Accts.  Rec 3,100- 

Mdse 4,300  - 

Furn.  &  Fix 1 ,200  - 

Expense 150  - 

Rent 200  - 


$9.95o 


Liabilities: 
Accts.  Pay  . .  .     $4,400 
Notes  Pay 2,300 


Total $6,700- 

Capital: 

J.  W.  Mc- 
carty's In- 
vestment.. .     $2,500- 

Add:  Profit.. .  750- 

Total ~ 


3,250- 
$9,950- 


COMPARATIVE  STATEMENTS 
October  31,  192 1 


77 


Assets : 

Cash $1,900 

Accts.  Rec 1,200 

Notes  Rec 1,600 

Mdse 4,000 

Furn.  &  Fix 1,150 

Expense 100  ■ 


>.95°- 


Liabilities: 

Accts.  Pay 

$3,700  - 

Notes  Pay 

1,800- 

Total 

Capital : 

J.      W.      Mc- 

Carty's  In- 

vestment. . . 

$3,250- 

Add:  Profit..  . 

1,200- 

Total 

$5,500 


4,450  - 
$9,950  - 


6.  On  June  13,  1920,  Samuel  Cohen  had  the  following  assets: 


Goods  on  Hand 

Cash 

Due  from  Customers . 
Notes  Receivable 
Land 


50,000  - 
4,000  - 
5,000- 
3,000  - 
1,900  - 


Total $19,900 


His  liabilities  were : 

Mortgage  Payable $8,000 

Notes  Payable 4,000 

Due  to  Creditors 3,o°° 


Total $15,000 


On  June  13,  1921,  he  had: 

Goods  on  Hand 

Cash 

Due  from  Customers  — 
Land 


55,000 
2,500 
2,500 
2,000 


Total 

His  liabilities  were: 

Mortgage  Payable     $8,000  - 

Notes  Payable 2,000  - 

Due  to  Creditors 2,000  - 

Total 


78 


FUNDAMENTALS  OF  ACCOUNTING 


Joseph  Smith 

Statement  of  Assets,  Liabilities,  and  Capital 

March  31,  1920 


Cash $  1,500 

Merchandise 5, 000 

Accounts  Receivable. . .  2,000 

Notes  Receivable 3,000 

Plant 5,000 

Bonds 2,000 

Furniture  and  Fixtures .  2,000 

$20,500 


Accounts  Payable S   1,500 

Notes  Payable 3>000 

Mortgage  Payable 2,000 

Total $  6.500 

J.  Smith,  Capital 14,000 


120,500 


Joseph  Smith 

Statement  of  Assets,  Liabilities,  and  Capital 

March  31,  1921 


Cash $  2,000  - 

Merchandise 4,000  - 

Accounts  Receivable. . .  3,000  - 

Notes  Receivable 4,000  - 

Plant 6,000  - 

Bonds 2,000  - 

Furniture  and  Fixtures .  1 ,  500  - 

$22,500  - 


Accounts  Payable $  5,000 

Notes  Payable 2,000 

Mortgage  Payable 5, 000 

Total $12,000 

J.  Smith,  Capital 10,500 


122,500 


8.  At  the  end  of  the  year,  December  31,  1920,  Lorenz  Brown  had  capi- 
tal of  $10,000;  cash  in  bank  $3,000;  goods  in  stock  $4,000;  customers  owed 
him  $2,000;  and  he  had  notes  on  hand  for  $1,000.  He  valued  his  building 
at  $7,000  and  his  furniture  at  $3,000.  His  notes  outstanding  were  $5,000 
and  he  owed  his  creditors  $5,000  on  account. 

A  year  later  his  cash  in  bank  was  $2,500;  goods  on  hand  $4,000;  and 
customers  owed  him  $2,000.  He  valued  his  building  at  $7,000  and  his 
furniture  at  $2,750.  His  notes  outstanding  amounted  to  $4,000  and  he 
owed  his  creditors  $5,250, 


COMPARATIVE  STATEMENTS 


79 


Mathew  Douglas 

Statement  of  Assets,  Liabilities,  and  Capital 

January  31,  1919 


Cash 

$  4,000  - 

Notes  Payable 

$  4,000  - 

Notes  Receivable 

3,000  - 

Accounts  Payable 

10,000  - 

Accounts  Receivable. . . 

4,000  - 

Mortgage  Payable 

5,000- 

Real  Estate 

10,000  — 

Math.  Douglas,  Capital 

30,000  - 

Merchandise 

7,000  - 

Furniture  and  Fixtures. 

5,000  - 

Machinery 

16,000  - 

$49,000  - 

$ 49,000  - 

Mathew  Douglas 

Statement  of  Assets,  Liabilities,  and  Capital 

January  31,   1920 


Cash 

$  5»°°°- 

Notes  Payable 

$  7,000- 

Notes  Receivable 

6,000  - 

Accounts  Payable 

16,000  - 

Accounts  Receivable. . . 

5,000  - 

Mortgage  Payable 

3 ,000  - 

Real  Estate 

11,000  — 

Math.  Douglas,  Capital 

30,000  - 

Merchandise 

9,000  - 

Furniture  and  Fixtures. 
Machinery 

4,000  - 
16,000  - 

$56,000  - 

$56,000  - 

CHAPTER  VIII 
DEVELOPMENT  OF   THE   EQUATION 

Purpose  of  Chapter. — 

i.  Basic  equation  used  to  record  business  transactions. 
2.  Development  of  the  equation  for  this  purpose. 

Recording  Increases  and  Decreases. — Since  all  change  in 
capital  is  due  to  changes  in  assets  and  liabilities,  all  financial  in- 
formation will  be  obtained  from  the  history  of  the  increases  and 
decreases  in  assets,  liabilities,  and  capital.  To  obtain  the  causes 
of  changes  in  capital,  we  record  the  causes  of  all  changes  in  assets 
and  liabilities,  and  then  collect  those  cause  records  which  have 
an  effect  on  capital.  A  statement  of  assets  and  liabilities  pre- 
pared at  the  beginning  and  at  the  end  of  a  period  shows  financial 
condition  on  the  two  dates.  This  comparative  statement  tells 
nothing  as  to  what  has  taken  place  between  the  two  dates.  Only 
a  device  that  will  enable  one  to  record  all  changes  in  assets  and 
liabilities  as  they  occur  will  provide  this  information. 

A  succession  of  comparative  statements,  one  for  each  day, 
might  be  used.  While  this  would  indicate  the  source  of  changes, 
it  would  prove  cumbersome  and  would  not  show  total  increases 
and  decreases  in  the  individual  assets  and  liabilities  for  a  year  or 
less — something  that  is  of  great  value  in  managing  a  business. 

The  Device. — To  develop  a  device  that  will  meet  the  needs 
at  all  times,  we  shall  begin  with  a  simple  statement  of  assets, 
liabilities,  and  capital,  and  show  changes — increases  and  decreases 
—by  the  equation  method,  and  then  rearrange  the  equation  so 
as  to  collect  the  data  easily  and  effectively. 

80 


DEVELOPMENT  OF  THE  EQUATION  8 1 

Transaction  i.  Henry  Dixon  begins  business  with  assets  of 
$5,000  and  liabilities  of  $1,000.     This  may  be  stated: 

Assets $5,000 

Liabilities 1 ,000 


Capital $4,000 

or 

Assets,  $5,000  —  Liabilities,  $1,000  =  Capital,  $4,000 

By  rearranging  the  minus  items  the  equation  may  be  stated 
in  positive  terms,  thus: 

Assets,  $5,000  =  Liabilities,  $1,000  +  Capital,  $4,000 

Transferring  the  minus  item  to  the  opposite  side  of  the  equal- 
ity sign  and  adding  it  to  the  items  on  that  side  has  the  effect  of 
subtracting  it  from  the  items  on  the  side  where  it  originally 
appeared. 

To  explain  how  the  equation  may  be  used  to  record  all  in- 
creases and  decreases,  assume  that  Dixon  buys  $100  in  mer- 
chandise for  cash.  The  asset,  merchandise,  has  been  exchanged 
for  the  asset,  cash.  The  effect  of  this  transaction,  the  carrying 
out  of  a  business  deal  with  others,  is  shown  in  the  following 
equation : 

Assets,    $5,000  +  Assets,   $100  —  Assets,   $100  =  Liabilities,    $1,000  -f 

Capital,  $4,000 

Stated  in  positive  terms  by  transposing  minus  items — 

Assets,  $5,000  +  Assets,  $100  =  Liabilities,  $1,000  +  Capital,  $4,000  -f 

Assets,  $100 

Simplifying  the  equation,  that  is,  collecting  all  items  of  the  same 
kind,  we  have: 

Assets,  $5,000  =  Liabilities,  $1,000+  Capital,  $4,000 

6 


82 


FUNDAMENTALS  OF  ACCOUNTING 


which  leaves  us  just  where  we  started.  This  is  correct  because 
Dixon  merely  exchanged  one  asset  of  $100  for  another  of  the  same 
amount,  leaving  his  total  assets  unchanged. 

Changing  the  Form  of  the  Equation. — While  the  horizontal 
equation  affords  a  means  of  recording  changes,  it  is  cumbersome 
and  does  not  lend  itself  readily  to  obtaining  the  totals  of  increases 
and  decreases.  A  change  in  the  arrangement  of  the  equation 
provides  for  obtaining  totals  easily.  Instead  of  the  horizontal, 
use  the  vertical  equation.  The  equality  sign  may  be  vertical 
and  extended,  thus: 


(i)  Assets $5,000 


(1)  Liabilities $1,000 

(1)  Capital 4,000 


The  items  marked  (1)  are  the  original  assets,  liabilities,  and 

capital  of  Henry  Dixon. 

We  shall  now  show  how  the  vertical  equation  is  used : 
Transaction  2.  Dixon's  purchase  of  $100  in  merchandise  for 

cash  will  be  recorded  as  follows: 


(1)    Assets. 
(2a)  Assets. 


;,ooo 
100 


(1)     Liabilities $1,000 

(1)     Capital 4,000 

(2b)  Assets 100 


The  increase  in  assets  of  $100  due  to  the  purchase  of  mer- 
chandise is  shown  by  item  (2a)  on  the  left  side,  and  the  decrease 
in  assets  of  $100,  due  to  the  payment  of  cash  is  recorded  as  item 
(2b)  on  the  right  side  of  the  equality  sign.  This  has  the  effect  of 
subtracting  $100  from  the  total  assets  of  $5,100  on  the  left  side. 
As  assets  have  increased  $100  and  decreased  $100,  there  has  been 
no  change,  and  since  liabilities  remain  the  same,  capital  has  not 
changed. 

Transaction  3.  Dixon  paid  $500  of  his  liabilities  in  cash.  The 
record  will  be: 


DEVELOPMENT  OF  THE  EQUATION 


83 


(1)    Assets 

(2a)  Assets 

(3a)  Liabilities. 


;,ooo 
100 
500 


(1)  Liabilities $1,000 

(1)  Capital 4,000 

(2b)  Assets 100 

(3b)  Assets 500 


The  decrease  in  liabilities  of  $500  (3a)  is  entered  on  the  op- 
posite side  of  the  equality  sign  from  the  original  liabilities  of 
$1,000  and  thus  has  the  effect  of  deducting  that  amount  ($500) 
from  the  liabilities.  The  decrease  in  assets  of  $500  is  entered  as 
item  (3b)  on  the  side  opposite  the  original  assets  and  indicates  a 
$500  reduction  in  assets. 

That  these  transactions  have  no  effect  on  capital  may  be 
proved  as  follows: 

Assets : 

Original  (left  side  of  equation) $5,000  - 

Plus  Increase  (item  2a) 100  - 

Total $5,100- 

Less:  Decrease  (items  2b  and  3b) 600  - 

Equals  assets  now  owned $4,500  - 

Liabilities: 

Original  (right  side  of  equation) $1,000  - 

Less:  Decrease  (item  3a) 500  - 

Equals  liabilities  now  owed 500  - 

Capital: 

Original  (right  side  of  equation) $4,000  - 

Plus  increase  and  minus  decrease o  - 

Equals  Present  Capital $4,000  - 


The  amount  of  the  present  capital,  $4,000,  can  be  verified  by 
deducting  the  total  liabilities  of  $500  from  the  total  assets  of 
$4,5°°- 


84 


FUNDAMENTALS  OF  ACCOUNTING 


Improving  the  Equation.— The  equation  may  be  improved  by 
allowing  more  space  for  each  group,  assets,  liabilities,  and  capital 
and  assigning  to  each  a  definite  part  of  the  equality  sign. 


(i)     Assets 

(2a)  Assets 

(3a)  Liabilities. 


;,ooo 
100 

500 


(2b)  Assets $    100 

(3b)  Assets 5°° 

(1)     Liabilities 1,000 

(1)     Capital 4.000 


The  method  of  recording  all  changes  in  each  group  may  be 
indicated  as  follows: 


Assets: 


Increases 
Decreases 
Decreases 


Liabilities: 


Capital: 


Decreases 


Increases 


Increases 


Final  Form  of  the  Equation. — We  observe  that  increases  in  a 
group  are  always  on  the  same  side  of  the  equality  sign  as  the 
original  group  and  decreases  always  on  the  side  opposite  the 
original  group.  Since  the  name  of  the  group,  i.e.,  asset,  liability, 
or  capital,  indicates  the  side  on  which  increases  or  decreases  will 
be  written,  it  is  more  convenient  to  write  the  name  of  the  group 
in  the  center,  across  the  equality  sign.  The  final  form  of  the 
equation  is  shown  below: 


Increases 


Decreases 


Assets 


Liabilities 


Decreases 


Increases 


Capital 


Decreases 


Increases 


DEVELOPMENT  OF  THE  EQUATION 


>J 


The  effect  of  recording  an  amount  on  either  side  of  the 
equality  sign  may  be  summarized  as  follows: 

Summary  of  Increases  and  Decreases  in  Assets,  Liabilities,  and 

Capital 


An  amount  entered  on  the  left  side 
must  show  one  or  more  of  the 
following: 

Increase  in  Assets 
Decrease  in  Liabilities 
Decrease  in  Capital 


An  amount  entered  on  the  right 
side  must  show  one  or  more  of 
the  following: 

Decrease  in  Assets 
Increase  in  Liabilities 
Increase  in  Capital 


The  New  Equation  in  Use. — How  Henry  Dixon's  transac- 
tions may  be  recorded  in  this  new  form  of  equation  is  shown 
below: 

i.  Henry  Dixon  begins  business  with  assets  of  $5,000  and 
liabilities  of  $1,000. 

2.  He  buys  $100  in  merchandise  for  cash. 

3.  He  pays  $500  of  his  liabilities  in  cash. 

Each  transaction  is  numbered  as  above  and  should  be  traced 
into  the  equation. 


Assets 


Increases 


(1) 

(2) 


(3) 


;,ooo 
100 


(2). 
(3). 
Liabilities 


Decreases 


Decreases 


$    500 


Increases 


(1) 


Decreases 


Capital 


(1) 


Increases 


$100 
500 


$1,000 


$4,000 


Summarizing  this  information  we  find : 


86  FUNDAMENTALS  OF  ACCOUNTING 

Assets  (excess  of  increases  over  decreases) $4,5°° 

Liabilities  (excess  of  increases  over  decreases) 5oc 

Capital  (excess  of  increases  over  decreases) $4.oo° 

The  capital  is  also  found  by  subtracting  liabilities  from  assets, 
in  accordance  with  the  simple  basic  equation,  A  -  L  =  C. 
Comparing  the  present  with  the  original  capital  we  find  that  no 
change  has  occurred,  because  none  of  the  transactions  affected 
capital. 

Recording  Transactions  Affecting  Capital.— It  was  shown  in 
Chapter  VI  that  capital  increases  if  assets  increase  and  decreases 
if  assets  decrease,  liabilities  remaining  the  same.  There  are 
other  causes  of  change  in  capital,  but  these  two  will  be  sufficient 
for  our  purpose  at  present. 

Transaction  i.  John  Smith  begins  business  with  assets — 
cash,  merchandise,  etc. — of  $6,000.  With  the  investment  of  his 
assets  in  the  business  the  equation  becomes : 

Assets,  $6,000  =  Liabilities,  $0  +  Capital,  $6,000 

See  items  marked  (1)  in  the  equation  on  page  87. 

Transaction  2.  Smith  sells  merchandise  that  cost  him  $2,000 
for  $3,000  cash.  There  has  been  an  increase  of  $3,000  in  the 
asset,  cash  (see  item  2a),  and  only  a  $2,000  decrease  in  the 
asset,  merchandise  (see  item  2b).  Expressed  in  general  terms, 
i.e.,  not  using  individual  names,  assets  are  now  $7,000 
($6,000  +  $3,000  —  $2,000),  the  excess  of  increases  over  de- 
creases, and  since  liabilities  have  not  changed,  there  must  be 
an  increase  in  capital  of  $1,000  (see  item  2c). 

Transaction  3.  During  the  period  Smith  purchased  for  cash 
the  right  to  use  the  building  (rent),  postage,  stationery,  clerks' 
services,  etc.,  to  the  amount  of  $700.  This  exchange  of  the 
asset,  cash,  for  other  assets  recorded  in  general  terms,  results  in 
an  increase  in  assets  of  $700  (item  3a)  and  a  decrease  of  $700 


DEVELOPMENT  OF  THE  EQUATION 


87 


(item  3b),  causing  no  change  in  capital,  for  neither  assets  nor 
liabilities  have  changed. 

Transaction  4.  At  the  end  of  a  month  it  is  found  that  $500  of 
the  assets,  right  to  use  the  building,  postage,  stationery,  clerks' 
services,  etc.,  were  consumed  during  the  period.  There  has  been 
a  decrease  in  assets  of  $500  (item  4b),  and  since  liabilities  have 
not  changed,  capital  must  have  decreased  $500  (item  4a)  as  well. 


Assets 
Increases 

(1)    $6,000        (2b) 

(2a) 3,000        (3b) 

(3a) • 700        (4b) 

•Liabilities 
Decreases 


Decreases 

$2,000 

700 

5°° 

Increases 


Capital 


Decreases 


(4a) 


$    500 


(1) 

(2C) 


Increases 


K),ooo 
1,000 


The  equation  may  be  summarized  as  follows : 


Assets  (excess  of  increases  over  decreases) 
Liabilities  (excess  of  increases  over  decreases) 

Capital  (excess  of  increases  over  decreases) . . 


,500 
o 


>,5°o 


The  capital  is  verified  by  subtracting  the  liabilities  from  the 
assets. 

While  this  form  of  the  equation  is  excellent  for  indicating  the 
effect  of  transactions  on  the  basic  groups,  assets,  liabilities,  and 
capital,  it  is  not  adapted  to  recording  in  detail  the  many  different 
transactions  that  take  place  daily.  The  next  chapter  will  show 
how  the  equation  may  be  adapted  to  meet  this  requirement. 


88  FUNDAMENTALS  OF  ACCOUNTING 

In  whatever  final  form  the  record  of  business  transactions  is 
to  be  made,  however,  the  student  must  always  think  in  terms  of 
assets,  liabilities,  and  capital.  If  he  cannot  indicate  the  effect 
of  every  transaction  in  this  way,  he  is  not  prepared  for  the  work 
that  follows  and  should  carefully  review  this  chapter. 

Questions 

i.  What  causes  change  in  capital? 

2.  How  can  the  sources  of  change  in  capital  be  obtained? 

3.  How  can  the  financial  condition  of  a  business  be  determined? 

4.  Describe  a  device  that  will  enable  one  to  indicate  all  changes  in 
assets,  liabilities,  and  capital. 

5.  How  may  subtraction  be  indicated  in  an  equation  without  using 
the  minus  sign? 

6.  (a)  What  is  a  transaction? 

(b)  Give  one  that  affects  only  assets. 

(c)  Give  one  that  affects  assets  and  liabilities. 

(d)  Give  one  that  affects  assets  and  capital. 

7.  What  is  the  best  form  of  equation  for  accounting?     Why? 

8.  Prepare  a  summary  of  increases  and  decreases. 

9.  On  which  side  of  the  equation  does  excess  of  assets  appear?  Lia- 
bilities?    Capital? 

10.  Jones  begins  business  with  $4,000  in  cash.    How  would  you  record 
this  in  the  vertical  equation? 

Problems 

1.  (a)  Record  the  following  data  in  a  vertical  equation  under  the 
general  headings  of  Assets,  Liabilities,  and  Capital.  Place  the  figures 
1,  2,  3,  4  opposite  the  items  to  which  they  apply  in  the  equation. 

(b)  From  the  equation  prepare  a  summarized  statement  of  assets, 
liabilities,  and  capital. 

1.  Charles  Black  began  business  with  assets  of  $5,000. 

2.  He  bought  merchandise  for  cash  $2,000. 

3.  He  bought  merchandise  on  account  $1,000. 

4.  He  paid  $400  in  cash  on  his  debt  (item  3). 

2.  (a)  Record  in  an  equation;  (b)  prepare  a  summarized  statement. 

1.  C.  C.  Hughes  began  business  with  $6,000  in  assets. 

2.  He  paid  $200  in  cash  for  1  month's  rent  in  advance. 


DEVELOPMENT  OF  THE  EQUATION  89 

3.  He  bought  merchandise  for  cash  $2,000. 

4.  He  bought  store  fixtures,  on  account,  $1,000. 

5.  He  sold  merchandise  that  cost  him  $1,000  for  $1,500  in  cash. 

6.  He  paid  cash  for  stamps,  stationery,  advertising,  clerks'  salaries,  etc., 

total  $300. 

7.  The  end  of  the  month  has  arrived  and  we  find  that  all  the  rent  (item  2) 

$200,  and  one-half  of  stamps,  etc.  (item  6)  $150,  have  been  consumed, 
total  $350. 
3.  (a)  Record  in  an  equation;  (b)  prepare  a  summarized  statement. 

1.  M.  S.  King  began  business  with  assets  of  $10,000  and  liabilities  of 

$3,000. 

2.  Bought  merchandise,  on  account,  $2,000. 

3.  Paid  cash  for  rent  $300. 

4.  Bought  merchandise  for  cash  $1,000. 

5.  Bought  furniture  and  fixtures  for  store  use  paying  cash  $1,000. 

6.  Paid  $500  in  cash  on  merchandise  bought  on  account  (item  2). 

7.  Sold  merchandise  that  cost  $1,500  for  $2,000  in  cash. 

8.  Bought  merchandise,  on  account,  $1,200. 

9.  Paid  $400  in  cash  for  miscellaneous  expenses,  such  as  postage,  clerks' 

salaries,  electric  light,  telephone,  etc. 

10.  Paid  $1,000  in  cash  on  original  liabilities  (item  1). 

11.  All  of  item  3  and  one-half  of  item  9  was  consumed. 

4.  (a)  Record  in  an  equation;  (b)  prepare  statement. 

1.  C.  E.  Rogers  began  business  with  cash  $3,000;  merchandise  $4,000; 

store  and  lot  $10,000.    He  owed  to  R.  D.  Brand,  on  account,  $1,000. 

2.  Paid  $200  in  cash  for  a  cash  register. 

3.  Sold  merchandise  that  cost  $1,000  to  D.  E.  Cutler  for  $1,500  in  cash. 

4.  Sold  merchandise  that  cost  $1,500  to  L.  F.  Foster  for  $2,200  on  account. 

5.  Paid  $500  in  cash  for  miscellaneous  expenses. 

6.  Bought  merchandise  from  Burns  and  Company,  on  account,  $2,000. 

7.  Paid  R.  D.  Brand  cash  for  amount  owed,  on  account,  $1,000  (item  1). 

8.  Received  check  for  $1,200  from  L.  F.  Foster  in  part  settlement  of 

what  he  owes  on  account  (item  4). 

9.  All  miscellaneous  expenses  were  consumed,  total  $500  (item  5). 
10.  Burglars  stole  merchandise  stock  estimated  at  cost  $200. 

5.  (a)  Record  in  an  equation;  (b)  prepare  statement. 

1.  Ralph  Horton  began  business  with  cash  $2,000;  merchandise  $7,000; 
furniture  and  fixtures  $1,200;  accounts  receivable  $3,000.  He  owed 
to  W.  H.  Harding,  on  account,  $8oo:  and  owed  on  a  note  in  favor  of 
F.B.  Willis  $1,200. 


90  FUNDAMENTALS  OF  ACCOUNTING 

2.  Paid  Star  Safe  Company  $800  in  cash  for  office  safe. 

3.  Sold  to  Hiram  Johnson,  on  account,  for  $3,000  merchandise  that  cost 

$2,000. 

4.  Bought  from  Sensible  Shoe  Company  merchandise  $3,000  and  gave 

them  his  note  payable  in  30  days  in  full  payment. 

5.  Sold  merchandise  for  cash  $4,500  (cost  $2,500). 

6.  Paid  cash  for  clerks'  salaries ;  Charles  Robins  $50  and  Harry  Norton  $60. 

7.  Bought  from  Kushion  Kar  Company  truck  for  delivery  purposes 

$1,500.     Paid  them  $500  in  cash  and  gave  his  note  for  the  balance. 

8.  Paid  cash  for  stationery,  advertising,  etc.,  $300. 

9.  Received  cash  on  accounts  receivable  $3,000.    (See  item  1.) 

10.  Paid  F.  B.  Willis  in  cash  for  note  payable  $1,200.    (See  item  1.) 

11.  Bought  merchandise  from  Ryan  and  Company  $1,600.     Paid  them 

one-half  cash,  balance  on  account. 

12.  Paid  River  Realty  Company  cash  for  rent  $300. 

13.  Paid  the  Sensible  Shoe  Company  cash  for  30-day  note  given  them  in 

item  4,  $3,000. 

14.  The  following  assets  have  been  consumed  in  operating  the  business: 

all  clerks'  salaries  $1 10  (item  6) ;  from  item  8,  stationery,  advertising, 
etc.,  $200;  one-half  the  rent  $150  (item  12). 

6.  (a)  Record  in  an  equation;  (b)  prepare  statement. 

1.  Silas  Marner  began  business  with  the  following  assets  and  liabilities: 
cash  $1,100;  delivery  equipment  $2,000;  furniture  and  fixtures 
$1,000;  merchandise  $6,000;  accounts  payable  $700;  notes  payable 
$500. 

2.  Paid  Triangle  Renting  Company  cash  for  rent  in  advance  $300. 

3.  Sold  to  James  P.  Sutton,  terms  one-half  cash,  balance  on  account, 

merchandise  $3 ,000.    This  merchandise  cost  $  1 , 800. 

4.  Bought  from  Underhill  and  Dodge  merchandise  $2,500,  terms  $500  in 

cash,  balance  on  account. 

5.  Paid  all  of  accounts  payable  $700  in  cash.     (See  item  1.) 

6.  Proprietor  withdrew  $100  in  cash  for  his  personal  use. 

7.  Sold  merchandise  that  cost  $1,700  for  $3,100  in  cash. 

8.  Paid  cash  for  miscellaneous  expenses  $175. 

9.  Received  from  James  P.  Sutton  his  30-day  note  in  full  payment  of  the 

balance  due  on  item  3. 

10.  Gave  the  note  received  from  Mr.  Sutton  (see  item  9)  to  Underhill  and 

Dodge  to  apply  on  account. 

11.  The  following  assets  were  consumed  in  conducting  the  business:  rent 

$200  (item  2) ;  miscellaneous  expenses  $125  (item  8). 


DEVELOPMENT  OF  THE  EQUATION  91 

7.  (a)  Record  in  an  equation;  (b)  prepare  statement. 

1 .  Gilbert  Larabee  began  business  with  the  following  assets  and  liabilities : 

merchandise  $4,000;  cash  $1,000;  real  estate  $10,000;  furniture  and 
fixtures  $500;  mortgage  payable  $2,000;  accounts  payable  $2,500. 

2.  Sold  to  Frank  Hees  for  cash,  merchandise  for  $200  which  cost  $160. 

3.  Sold  to  Glen  Freed,  on  account,  merchandise  for  $1 75  which  cost  $100. 

4.  Paid  cash  on  accounts  payable  $500.    (See  item  1.) 

5.  Received  from  Glen  Freed  cash,  on  account,  $100.    (See  item  3.) 

6.  Sold  to  George  Frederickson  merchandise  for  $800  which  cost  $500. 

Received  Mr.  Frederickson's  note  for  same. 

7.  Paid  cash  on  accounts  payable  $500.    (See  item  1.) 

8.  Bought  merchandise  of  $400  from  Leslie  Nash  on  account. 

9.  Paid  salaries  of  $125  and  miscellaneous  expense  $50. 

10.  Salaries  and  miscellaneous  expense  in  item  9  were  consumed  in  con- 
ducting the  business. 

8.  (a)  Record  in  an  equation;  (b)  prepare  statement. 

1.  Benjamin  Mobach  started  business  with  cash  $10,000. 

2.  Bought  for  cash  furniture  and  fixtures  from  Stern  Brothers  to  the 

amount  of  $1,000. 

3.  Paid  cash  for  rent  of  storeroom  $125. 

4.  Bought  merchandise  from  Bushman  and  Dyne  amounting  to  $3,000, 

for  which  he  paid  $1,000  in  cash  and  gave  his  30-day  note  for  the 
balance. 

5.  Paid  $8  for  freight  and  cartage  on  merchandise. 

6.  Paid  $2,000  cash  for  a  delivery  truck. 

7.  Sold  to  Franklin  Whitwell  for  cash  $1,400,  merchandise  which  cost 

$1,000. 

8.  Sold  to  Martin  Flagg,  on  account,  for  $700,  merchandise  which  cost 

$520. 

9.  Paid  $15  for  miscellaneous  expenses. — 

10.  Paid  his  30-day  note  of  $2,000.    (See  item  4.) 

11.  Martin  Flagg  returned  goods  for  which  he  was  originally  charged  $50. 

This  merchandise  cost  $40. 

12.  The  following  assets  were  consumed  in  conducting  the  business:  rent 

$125  (item  3);  miscellaneous  expense  $15  (item  9). 

9.  (a)  Record  in  an  equation;  (b)  prepare  statement. 

1.  Joe  Ebel  began  business  with  the  following  assets  and  liabilities:  mer- 
chandise $5,000;  cash  $1,500;  furniture  and  fixtures  $600;  accounts 
payable  $800;  note  given  to  Charles  Hood  $300. 


92  FUNDAMENTALS  OF  ACCOUNTING 

2.  Rent  for  storeroom  paid  in  cash  for  one  month  in  advance  $300. 

3.  Paid  $5  for  installation  of  telephone. 

4.  Sold  merchandise  to  Oscar  Hervey  on  account  $200.    This  merchan- 

dise cost  $130. 

5.  Sold  merchandise  that  cost  $1,400  to  Clarence  Lavender  for  $2,500 

cash. 

6.  Paid  cash  for  clerks'  salaries:  Ned  Payne  $30;  Frank  Sweeney  $40; 

and  Lorel  Hadigan  $45. 

7.  Bought  from  the  Surety  Safe  Company  an  office  safe  for  $500.    Gave 

note  for  $400  and  cash  for  the  balance. 

8.  Oscar  Hervey  returned  merchandise  for   which   he   was   originally 

charged  $50.    Cost  of  it  was  $42.    (See  item  4.) 

9.  Bought  merchandise,  on  account,  from  Gamble  and  Star  $375. 
10.  Paid  cash  for  light  and  heat  $25. 

n.  Oscar  Hervey  paid  $125  on  his  account.    It  is  impossible  to  collect  the 
remaining  $25.    (See  item  4.) 

12.  Returned    merchandise    to    the    amount    of    $75    to    Gamble    and 

Star. 

13.  Mr.  Ebel  was  robbed  of  $80  while  taking  it  to  the  Wabash  Bank. 

14.  Items  consumed  in  conducting  the  business:  rent  $300   (item   2); 

salaries  $115  (item  6);  light  and  heat  $25  (item  10). 

10.  (a)  Record  in  an  equation;  (b)  prepare  statement. 

1.  Bevan  Townsend  opened  a  grocery  store  with  the  following  assets  and 

no  liabilities:  merchandise  $800;  cash  $400;  building  and  lot  $4,500. 

2.  Sold  for  cash,  merchandise  for  $115  which  cost  $75. 

3.  Sold  on  account  to  Mrs.  Luella  Butler,  merchandise  which  cost  $7  for 

$9- 

4.  Bought  a  cash  register  for  $75.    Gave  his  30-day  note  in  payment. 

5.  Paid  Johnny  Dunn,  delivery  boy,  wages  of  $7. 

6.  Paid  for  stationery,  postage,  etc.,  $3. 

7.  Mrs.  Luella  Butler  returned  goods  that  were  spoiled  amounting  to  $3. 

Cost  $2.20  (item  3). 

8.  Bought  merchandise  on  account  from  Kroger  and  Company  $100. 

9.  Paid  Aaron  Maxwell  $4  for  fresh  strawberries. 

10.  Sold  the  strawberries  of  item  9  to  Andy  Fink  for  $5  cash. 

11.  Paid  miscellaneous  expense  of  $12. 

12.  Mrs.  Luella  Butler  paid  her  account  in  full  $6.     (See  items  3  and 

?•) 

13.  Assets  consumed  amount  to  $22.    (See  items  5,  6,  and  11.)    Spoiled 

goods  destroyed  $2.20  (item  7). 


DEVELOPMENT  OF  THE  EQUATION  93 

ii.  (a)  Record  in  an  equation;  (b)  prepare  statement. 

i.  Clarence  Hussey  opened  business  with  the  following  assets  and  lia- 
bilities: merchandise  $9,000;  cash  $1,800;  furniture  and  fixtures 
$700;  delivery  car  $1,800;  real  estate  $20,000;  investments  in  stocks 
and  bonds  $2,500;  office  stationery  $16;  gasoline  for  car  $9;  accounts 
payable  $3,000;  notes  payable  $5,000 ;  mortgage  on  real  estate  $6,000. 

2.  Paid  cash  for  miscellaneous  expense  $45. 

3.  Sold,  on  account  to  Lemuel  Kastor  merchandise  which  cost  $1,200  for 

$2,000. 

4.  Sold  to  Paul  Miller  merchandise  costing  $900  for  $1,500     Received 

$500  cash  and  two  notes  for  $500  each. 

5.  Lemuel  Kastor  returned  merchandise  to  the  amount  of  $500.     Cost 

$400  (item  3). 

6.  Paid  $1,500  cash  on  accounts  payable  and  gave  60-day  note  for  $1,500 

(item  1). 

7.  Received  $35  cash  for  rent  of  part  of  the  office. 

8.  Paid  $6  to  Nathaniel  Hathaway  for  garage  rent. 

9.  Lemuel  Kastor  paid  his  account  in  full  $1,500  cash  (items  3  and  5). 
10.  Assets  consumed:  gasoline  $6  (item  1);  wear  on  the  car  $50  (item  1); 

miscellaneous  expense  $20  (item  2);  garage  rent  $6  (item  8). 


CHAPTER   IX 

EXPANSION   BY   SUBSTITUTION 

Purpose  of  Chapter. — 
i.  Substitution  of  individual  for  group  titles  in  the  equation 

of  assets,  liabilities,  and  capital. 
2.  Preparation  of  a  statement  of  assets,   liabilities,   and 

capital,  using  individual  titles. 

Reason  for  Expansion. — The  primary  purpose  of  expansion 
is  to  provide  information.  Financial  condition  on  a  given  date  is 
determined  by  means  of  a  statement  of  assets,  liabilities,  and  net 
worth,  or  capital.  This  information  is  useful  in  managing  a 
business,  but  it  is  of  greater  value  to  know  what  is  happening 
from  day  to  day,  since  these  operations  show  the  movement  of 
the  business,  how  it  is  thriving,  its  success  or  failure.  Past  events 
in  history  explain  present  conditions  and  aid  in  determining  the 
future  policies  of  nations.  So  also  the  past  operations  of  an 
enterprise  indicate  the  cause  of  its  present  condition  and  point  the 
way  to  financial  and  operating  policies  most  likely  to  produce  the 
best  results  in  the  future. 

Information  concerning  daily  operations  is  obtained  by  ex- 
panding the  group  divisions  of  the  equation.  The  different  kinds 
of  assets  are  separated  into  such  groups  as  cash,  accounts  re- 
ceivable, merchandise,  etc.;  liabilities,  into  accounts  payable, 
notes  payable,  etc.;  and  capital  into,  John  Jones,  Capital,  etc. 

Expanding  by  Substitution. — Heretofore  the  general  terms, 
assets,  liabilities,  and  capital  have  been  used  to  record  increases 
and  decreases.    Now  by  substituting  for  the  general  terms  the 

94 


EXPANSION  BY  SUBSTITUTION 


95 


names  of  the  individual  assets  and  liabilities  we  can  find  the  in- 
dividual increases  and  decreases.  The  student  must,  however, 
always  think  first  of  the  effect  on  the  group,  asset,  liability,  or 
capital,  and  then  substitute  for  the  group  title  the  individual 
asset,  liability,  or  capital  title.  The  same  form  of  equation  will 
be  used  no  matter  how  great  the  expansion.     For  example: 

Transaction  i.  John  Smith  begins  business  with  $5,000  in 
cash.     Recording  this  in  general  terms,  we  have: 


Increases 


(1) 


Decreases 


Decreases 


Assets 

;,ooo 
Liabilities 

(1)  None. 
Capital 


(1) 


Decreases 


Increases 


Increases 


$5,000 


By  substituting  the  names  of  the  individual  asset  and  the 
person  whose  capital  has  been  affected,  the  equation  appears  as 
follows : 


Increases 


(0. 


Cash 

AOOETG 


$5, 000 

LlADILITIBG 


Decreases 


(1)  None. 


John  Smith's  Capital 
Capital 


Decreases 


Increases 


Decreases 


Increases 


(1) 


$5,000 


96  FUNDAMENTALS  OF  ACCOUNTING 

Since  the  name  "Cash"  indicates  that  it  is  an  asset,  we  enter 
the  increase  under  that  title,  and,  applying  the  same  reasoning  to 
capital,  we  enter  its  increase  under  the  name  of  "John  Smith's 
Capital."  Since  liabilities  have  not  been  affected  we  omit  that 
title.     The  following  equation  indicates  what  took  place: 

Cash 

Decreases 
Increases 

Ci) •••    $5,ooo 

John  Smith's  Capital 


Decreases 


Increases 


(1) 


5,000 


Additional  transactions  expand  the  equation  as  follows: 
Transaction  2.  Smith  buys  merchandise  for  cash  $3,000. 


Cash 


Increases 


(1) 


5,000 


Decreases 


(2) 


$3,000 


Increases 


(2) 


Merchandise 

. .     $3,000 

John  Smith's  Capital 


Decreases 


Decreases 


Increases 


(1) 


$5, 000 


Since  this  is  merely  an  exchange  of  assets  we  have  a  decrease 
in  the  asset,  Cash,  of  $3,000  (item  2)  and  an  increase  in  the  asset, 
Merchandise,  of  $3,000  (item  2).  The  entry  of  $3,000  on  the  left 
side  indicates  an  increase  of  that  amount  in  the  asset,  Merchan- 
dise. We  now  have  two  assets  aggregating  $5,000 — Cash,  $2,000 
($5,000 — $3,000),  and  Merchandise,  $3,000.  The  plan  of  ex- 
pansion is  simply  to  add  the  names  of  the  individual  assets  and 
liabilities  affected  through  increases  and  decreases. 


EXPANSION  BY  SUBSTITUTION 


97 


Transaction  3.  Smith  sells  merchandise  that  cost  $1,400  to 
Henry  Hall  on  account  for  $2,000.     The  equation  now  appears: 


(1) 


(2) 


Cash 


Increases 


Decreases 


(2) 


Merchandise 


Increases 


;,ooo 


Decreases 


(3) 


$3,000 


$1,400 


Accounts  Receivable 


Increases 

(3)  H.  Hall $2,000 

John  Smith's  Capital 


Decreases 


Decreases 


Increases 


(1) 

(3) 


;,ooo 
600 


This  transaction  has  an  effect  on  two  assets  and  on  capital. 
The  asset,  Accounts  Receivable  (claims  against  others) ,  has  been 
increased  $2,000  (item  3)  and  is  entered  on  the  left  under  that 
title,  Hall's  name  being  written  in  to  indicate  who  owes  Smith. 
The  asset,  Merchandise,  has  been  decreased  $1,400  (item  3),  the 
cost  of  the  goods  sold.  Therefore  that  amount  is  entered  on  the 
right  side  under  the  title,  Merchandise.  Capital  has  been  in- 
creased $600  (item  3),  the  difference  between  the  increase  and 
decrease  in  assets  ($2,000 — $1,400),  which  is  indicated  by  writing 
$600  on  the  right  under  John  Smith's  Capital.  In  other  words, 
the  total  assets  are  now  $5,600  (Cash,  $2,000  +  Merchandise 
$1,600  +  Accounts  Receivable,  $2,000)  and  since  the  liabilities 
are  zero,  the  capital  must  be  the  difference,  or  $5,600,  an  increase 

of  $600. 

Transaction  4.  Smith  sells  merchandise  that  cost  $1,000  for 

$1,500  in  cash. 
7 


98 


FUNDAMENTALS  OF  ACCOUNTING 


Transaction  5.     He  pays  S500  in  cash  for  various  supplies  for 
use  in  operating  the  business.     The  equation  is  again  expanded: 


Cash 
Increases 

(1) $5,000        (2)... 

(4) *>S°°        ($)■■■ 

Merchandise 


Decreases 


Increases 
(2) $3,000 


Decreases 


(3) 
(4) 


$3,000 
Soo 


$1,400 
1,000 


Accounts  Receivable 


Increases 

(3)  H.  Hall $2,000 

Expense 
Increases 

(5) :-     $    Soo 

John  Smith's  Capital 


Decreases 


Decreases 


Decreases 


Increases 


(1) 
(3) 
(4) 


$5, 000 
600 
500 


Transaction  4  increases  the  asset,  Cash,  $1,500  and  decreases 
the  asset,  Merchandise,  $1,000,  the  cost  of  the  goods  sold,  causing 
an  increase  in  capital  of  $500.  The  same  reasoning  applies  as  in 
transaction  3.  Transaction  5  results  in  a  decrease  of  $500  in  the 
asset,  Cash,  and  an  increase  of  $500  in  the  asset,  Supplies  to  be 
Consumed  in  Conducting  the  Business,  classified  under  the  title, 
Expense  (item  5). 

Transaction  6.  Buys  $2,000  worth  of  merchandise  from  Paul 
Brown  on  account. 

Transaction  7.  During  the  month  $200  of  various  assets 


EXPANSION  BY  SUBSTITUTION 


99 


included  under  Expense  were  consumed  in  operating  the  business. 
The  equation  now  shows : 


Cash 


Increases 


d) 

(4) 


>5,ooo 
1,500 

Merchandise 


Decreases 


(2) $3,000 

(5) Soo 


Increases 


(2) $3,000 

(6) 2,000 


Decreases 


(3) 
(4) 


$1,400 
.   1 ,000 


Accounts  Receivable 
Increases  Decreases 

(3)  H.Hall $2,000 

Expense 
Increases                                                Decreases 
(5) $S°o        (7) 


$200 


Accounts  Payable 


Decreases 


Decreases 


Increases 

(6)  Paul  Brown $2,000 

John  Smith's  Capital 


(7) 


$200 


Increases 


(i) 

(3) 
(4) 


$5,000 
600 
500 


In  transaction  6  an  increase  of  $2,000  in  the  asset,  Merchan- 
dise, is  recorded  on  the  left,  under  the  Merchandise  title,  and  an 
increase  in  liabilities  of  $2,000  in  the  amount  Smith  owes  on  the 
right  side  under  the  title,  Accounts  Payable.  The  name  of  Paul 
Brown  is  written  before  this  amount  to  show  to  whom  Smith 
owes  it.    Number  7  is  recorded  on  the  right  of  Expense  to  show 


IOO  FUNDAMENTALS  OF  ACCOUNTING 

that  these  assets  have  decreased  $200,  and  on  the  left  of  John 
Smith's  Capital  to  show  that  his  capital  has  decreased  $200. 
The  difference  between  total  assets  and  liabilities  is  now  $200 
less  than  before,  and  is  reflected  in  the  capital  decrease  of  $200. 

Preparing  Statements. — The  statements  are  merely  sum- 
maries of  the  information  appearing  in  the  equation.  To  obtain 
the  information  easily,  all  new  titles  for  assets,  such  as  Cash, 
Merchandise,  Accounts  Receivable,  and  Expense,  are  now  placed 
in  the  asset  division  of  the  equation.  This  plan  is  also  followed 
in  the  expansion  of  the  liability  and  capital  groups. 

From  the  information  contained  in  the  equation  the  financial 
condition  of  John  Smith  on  March  31 1  and  the  sources  of  the 
change  in  his  capital  are  set  forth  in  the  following  statements: 

John  Smith 

Statement  of  Assets,  Liabilities,  and  Capital 

March  31,  19 — 


Assets: 

Cash  (excess  of  increases  over  decreases) ....     $3,000  - 

Merchandise   (excess  of  increases  over    de- 
creases)          2,600  - 

Accounts  Receivable  (excess  of  increases  over 

decreases) 2,000  - 

Expense  (excess  of  increases  over  decreases)  . .  300  - 

Total $7,900  - 

Liabilities: 
Accounts  Payable  (excess  of  increases  over 

decreases) $2,000  - 

Total 2,000  - 

Capital: 
John  Smith's  Capital  (excess  of  increases  over 


decreases) $5,900 

Total 


;,ooo- 


1  In  the  illustration  it  is  assumed  that  Smith  began  business  March  i.  10 — ,  and  has  been 
operating  one  month. 


EXPANSION  BY  SUBSTITUTION 


IOI 


John  Smith 

Statement  Showing  Sources  of  Increases  and  Decreases  in 

Capital 

From  March  i  to  31,  ig — 


Increases: 

Profit  on  sale  of  merchandise  (item  3) $600  - 

"  (item  4) 500  - 


a  a       u       a 


Total $1,100 

Decreases: 

Expense  assets  consumed  (item  7) $200  - 


Total 

Net  Increase  in  Capital . 


900 


Explanation  of  J.  Smith's  Capital 
March  31,  19 — 


Investment,  March  1,  19 — 

Add  Net  increase  in  Capital  as  above . 


$5,000 
900 


Capital,  March  31,  19 — $5, 900 


The  capital  is  verified  by  subtracting  the  liabilities  from  the 
assets. 


Questions 

1.  What  is  the  purpose  of  expanding  the  equation? 

2.  What  do  the  past  operations  of  a  business  indicate? 

3.  How  can  information  concerning  its  past  operations  be  used  in  the 
management  of  the  business? 

4.  Explain  "expansion  by  substitution." 

5.  Under  what  conditions  can  changes  in  assets  occur  without  chang- 
ing capital? 

6.  (a)  Explain  the  effect  on  assets,  liabilities,  and  capital  of  a  sale  of 
merchandise  for  more  than  its  cost. 


102 


FUNDAMENTALS  OF  ACCOUNTING 


(b)  How  would  you  record  this  in  the  equation? 

7.  (a)  Why  is  the  title,  Expense,  used  in  the  expanded  equation? 
(b)  Name  five  items  you  would  classify  under  Expense. 

8.  Prove  that  assets  consumed  in  operating  a  business  result  in  a 
decrease  in  capital. 

9.  (a)  Explain  three  ways  of  producing  decreases  in  capital, 
(b)  Give  a  transaction  illustrating  each. 

10.  (a)  Explain  three  ways  of  producing  increases  in  capital, 
(b)  Give  a  transaction  illustrating  each. 

11.  How  can  the  present  capital  of  a  business  be  verified? 

12.  What  information  is  contained  in  the  statement  explaining  the 
capital? 

Problems 

1.  James  Gaffney  began  business  with  $4,000  in  cash. 

(a)  Record  in  the  vertical  equation,  using  the  general  titles,  Assets, 
Liabilities,  and  Capital. 

(b)  Cross  out  the  general  terms  and  substitute  the  individual  titles. 

2.  (a)  Record  in  vertical  equation,  using  general  titles  only, 
(b)  Record  in  another  vertical  equation,  using  the  individual  titles 
instead  of  the  general  titles. 

1.  Fred  Warren  began  business  with  the  following:  cash  $2,000;  accounts 

receivable  $1,500;  merchandise  $6,000. 

2.  Bought  merchandise  for  cash  from  A.  H.  Hill  $1,000. 

3.  Sold  to  William  P.  Richards,  on  account,  merchandise  that  cost  $2,500 

for  $3,100. 

4.  Received  cash  from  all  the  old  accounts  receivable  $1,500. 

5.  Bought  merchandise  from  R.  T.  Dunn,  on  account,  $1,700. 

3.  (a)  Record  in  vertical  equation,  using  general  titles  only, 
(b)  Record  in  another  vertical  equation,  using  the  individual  titles  in- 
stead of  the  general  tides. 

1.  Ralph  Rowland  began  business  with  the  following  assets  and  liabilities: 

cash    $1,800;    merchandise    $5,000;    accounts   receivable    $1,500; 
accounts  payable  $1 ,200. 

2.  Bought  for  cash  furniture  and  fixtures  $700. 

3.  Sold  merchandise   to  Alexander  Walker,  on  account,  $2,800  (cost 

$2,000). 

4.  Received  cash  from  all  the  old  accounts  receivable  $1,500. 


EXPANSION  BY  SUBSTITUTION  103 

5.  Paid  in  cash  the  accounts  payable  $1,200. 

6.  Received  cash  from  Alexander  Walker,  on  account,  $1,500. 

7.  Sold  merchandise  that  cost  $1,200  for  $1,700  in  cash. 

4.  (a)  Record  in  vertical  equation  under  general  titles. 

(b)  Record  in  vertical  equation,  using  individual  titles. 

(c)  Prepare  a  statement  of  assets,  liabilities,  and  capital  from  informa- 
tion in  (b). 

(d)  Prepare  a  statement  showing  sources  of  increases  and  decreases  in 
capital  from  information  in  (b) .    Assume  a  period  of  1  month. 

1.  James  D.  Hackett  began  business,  June  1,  19 — ,  with  the  following 

assets  and  liabilities:  cash  $2,000;  merchandise  $7,000;  furniture  and 
fixtures  $1,000;  due  from  H.  C.  Thompson,  on  account,  $800.  He 
owed  Ralph  P.  Blake,  on  account,  $1,100. 

2.  Sold  merchandise  that  cost  $2,000  to  William  Boyce,  on  account,  for 

$2,800. 

3.  Paid  $400  in  cash  for  various  supplies  to  be  used  in  operating  the 

business. 

4.  Paid  Ralph  P.  Blake  in  cash  $1,100  in  full  of  account  (item  1). 

5.  Sold  merchandise  to  A.  F.  Watson,  on  account,  for  $1,700  (cost  $1,200). 

6.  Received  cash  from  William  Boyce  $2,800.    (See  item  2.) 

7.  During  the  month  $150  of  the  supplies  purchased  as  item  3  were  con- 

sumed in  operating  the  business. 

5.  See  instructions  for  Problem  4. 

1.  Frank  Dixon  began  business  May  1, 19 — ,  with  the  following  assets  and 

liabilities:  merchandise  $2,000;  cash  $3,500;  Scott  Marmion  owes 
him,  on  account,  $650;  furniture  and  fixtures  $825;  he  owed  Don 
Byron  $700  on  account,  and  Jacob  Coleridge  $550  on  a  note. 

2.  Paid  rent  of  $150  in  cash. 

3.  Sold  merchandise  that  cost  $650  to  Harold  Chatterton  for  $900  on 

account. 

4.  Paid  $65  for  office  supplies. 

5.  Received  $350  from  Scott  Marmion  on  account  (item  1). 

6.  Paid  Don  Byron's  entire  account  $700  (item  1). 

7.  During  the  month  all  of  the  rent  of  $150  was  consumed  and  $20  of  the 

office  supplies  (items  2  and  4). 

6.  See  instructions  for  Problem  4. 

1.  L.  D.  Hergot  started  business  June  1,  19 — ,  with  the  following  assets 
and  liabilities:  cash  $10,000;  merchandise  $8,000;  land  and  building 


104 


FUNDAMENTALS  OF  ACCOUNTING 


825,000;  furniture  and  fixtures  $1,200;  due  from  George  Moon  $950. 
He  owed  Henry  Owens  S  2  ,000  and  Richard  Haynes  $1 ,  200  on  account. 

2.  Sold  to  Leslie  Goldman,  on  account,  merchandise  that  cost  $2,000,  for 

S3. 200. 

3.  Received  check  for  $500,  on  account,  from  George  Moon  (item  1). 

4.  Returned  merchandise  of  $650  to  Henry  Owens  (item  1). 

5.  Paid  miscellaneous  expense  of  $175. 

6.  Theft  of  $275  cash. 

7.  Sold  to  M.  N.  Bridges  merchandise  that  cost  $1,050,  for  $1,725  cash. 

8.  Paid  Richard  Haynes  cash  $600  on  account  (item  1). 

9.  During  the  month  all  of  the  miscellaneous  expense  was  consumed,  $175 

(item  5). 

7.  (a)  Record  in  vertical  equation,  using  individual  titles. 

(b)  Prepare  a  statement  of  assets,  liabilities,  and  capital  from  infor- 
mation in  (a). 

(c)  Prepare  a  statement  showing  sources  of  increases  and  decreases  in 
capital  from  information  in  (a).    Assume  a  period  of  1  month. 

1.  James  Harrison  started  business  July  1,  19—,  with  the  following  assets 

and  liabilities:  cash  $6,000;  merchandise  $8,250.   He  owed  Lawrence 
Monroe,  on  account,  $3,700. 

2.  Paid  rent  of  $185. 

3.  Bought  a  delivery  car  for  $1,275  casn- 

4.  Sold  merchandise  that  cost  $2,000  for  $3,050  cash. 

5.  Paid  Lawrence  Monroe  one-half  of  his  account,  $1,850,  and  gave  him  a 

30-day  note  for  the  balance  (item  1 ) . 

6.  During  the  month  all  of  the  rent  was  consumed  in  operating  the 

business  (item  2). 

8.  See  instructions  for  Problem  7. 

1.  R.  V.  Montgomery  started  business  August  1,  19 — ,  with  $10,000 

cash. 

2.  Bought  merchandise  of  $5,000,  on  account,  from  William  Ferris. 

3.  Bought  furniture  and  fixtures  of  $1 ,000,  on  account, from  Roy  Bauman. 

4.  Paid  $200  cash  for  rent. 

5.  Sold  merchandise  that  cost  $1 ,200  to  Carl  Coan,  on  account,  for  $1 ,675. 

6.  Sold  merchandise  that  Cost  $425  for  $600  cash. 

7.  Paid  $135  cash  for  office  supplies. 

8.  Carl  Coan  returned  merchandise  of  $500  as  unsatisfactory.    Cost  of 

this  merchandise  was  $300. 

9.  Paid  cash  for  insurance  on  merchandise  $60. 


EXPANSION  BY  SUBSTITUTION  1 05 

10.  The  following  assets  were  consumed  in  conducting  the  business :  rent 
$200  (item  4) ;  $50  of  office  supplies  (item  7) ;  $5  of  insurance  (item 
9). 

9.  See  instructions  for  Problem  7. 

1.  Browne  Elwell  started  business  September  1,  19 — ,  with  the  following 

assets  and  liabilities:  land  and  buildings  $20,000;  merchandise 
$10,000;  delivery  equipment  $2,000;  due  from  Mathew  Schleger 
$1,500  on  account.  He  owed  Arnold  Bennett,  on  account,  $600; 
owed  Leonard  Woodson  $10,000  on  a  note.    He  had  cash  of  $6,000. 

2.  Paid  miscellaneous  expenses  of  $350. 

3.  Sold  merchandise  that  cost  $2,000  to  Frank  Cox,  on  account,  for 

$3,200. 

4.  Paid  Arnold  Bennett  in  full  $600  (item  1). 

5.  Paid  salaries  of  $325. 

6.  Bought  an  office  safe  for  $525  cash. 

7.  Received  check  from  Frank  Cox  for  $3,150.    Remainder  of  account, 

$50,  is  uncollectible  (item  3). 

8.  Purchased  furniture  and  fixtures  from  Laswell  and  Son,  on  account, 

for  $1,300. 

9.  Mathew  Schleger  paid  one-half  of  his  account,  $750  in  cash  (item  1). 
10.  During  the  month  the  following  assets  were  consumed  in  conducting 

the  business:  $40  of  delivery  equipment  (item  1);  all  of  the  mis- 
cellaneous expenses  $350  (item  2) ;  all  of  the  salaries  $325  (item  5). 

10.  See  instructions  for  Problem  7. 

1.  David  Sprague  started  business  October  1,  19 — ,  with  the  following 

assets  and  liabilities:  merchandise  $6,000;  cash  $3,000;  furniture 
and  fixtures  $900.  He  owed  Judas  Bullock  $500  on  account  and  had 
on  hand  miscellaneous  supplies  of  $300. 

2.  Sold  merchandise  that  cost  $1,000  to  Morris  Terry  for  $1,700  cash. 

3.  Returned  merchandise  of  $250  to  Judas  Bullock  and  paid  the  re- 

mainder of  his  account  in  cash  (item  1). 

4.  A  fire  destroyed  $300  of  furniture  and  fixtures.    No  insurance. 

5.  Bought  new  furniture  and  fixtures  of  $400,  on  account,  from  Mason 

Butler. 

6.  Sold  merchandise  that  cost  $800  for  $1,250  cash. 

7.  Paid  salaries  to  John  Newman  $78,  Fred  Kates  $95,  and  Richard 

Flagg$i25. 

8.  During  the  month  the  following  assets  were  consumed:    miscellaneous 

supplies  of  $200  (item  1) ;  all  salaries  $298  (item  7). 


106  FUNDAMENTALS  OF  ACCOUNTING 

1 1     See  instructions  for  Problem  7. 

1.  William  Coolidge  started  business  November  1,  19 — ,  with  the  follow- 

ing assets  and  liabilities:  merchandise  $6,500;  cash  $3,400;  due  from 
Marion  Cotter  $375.    He  owed  $525,  on  account,  to  Walter  Eckert. 

2.  Bought  furniture  and  fixtures  from  Ernest  Kesler  for  $1,100.     Gave 

his  30-day  note  in  payment. 

3.  Sold  merchandise  that  cost  $875  to  Wilbur  Radigan,  on  account,  for 

$1,300. 

4.  Paid  $30  cash  for  insurance  on  stock. 

5.  Received  check  in  full  from  Marion  Cotter  $375  (item  1). 

6.  Bought  a  cash  register  for  $75,  on  account,  from  the  National  Cash 

Register  Company. 

7.  Paid  miscellaneous  expense  of  $275. 

8.  Drew  for  own  use  $150. 

9.  Paid  Walter  Eckert's  account  in  full  $525  (item  1). 

10.  Wilbur  Radigan  returned  merchandise  of  $350.     Cost  of  this  mer- 

chandise was  $200. 

11.  Sold  merchandise  that  cost  $1,000  for  $1,750  cash. 

12.  The  following  assets  were  consumed  in  conducting  the  business:  $2.50 

of  the  insurance  (item  4);  all  of  the  miscellaneous  expense  $275 
(item  7). 


CHAPTER   X 

EXPANSION  BY   SUBSTITUTION   (Continued) 

Purpose  of  Chapter. — 

i .  Expansion  of  Merchandise  into  Inventory,  Purchases,  and 
Sales. 

2.  Finding  the  cost  of  goods  sold. 

3.  Determining  profit. 

4.  Expansion  of  Expense  title. 

5.  Profit  and  loss  and  capital. 

Expanding  the  Merchandise  Title. — While  the  title,  Merchan- 
dise, permits  showing  increases  and  decreases  in  this  asset,  it 
fails  to  provide  all  the  information  usually  desired  concerning  it. 
Accordingly,  we  substitute  the  three  titles,  Merchandise  Inven- 
tory or  Stock,  Merchandise  Purchases,  and  Merchandise  Sales, 
as  being  more  convenient  devices  for  gathering  information. 
Merchandise  Inventory  represents  the  stock  of  merchandise  on 
hand  at  the  beginning  of  the  period;  Merchandise  Purchases,  the 
goods  acquired  during  the  period;  and  Merchandise  Sales,  the 
goods  sold  during  the  period.  The  selling  price  is  really  com- 
posed of  two  parts,  one  representing  the  decrease  in  the  asset. 
Merchandise,  the  other  the  gross  profit  on  the  sale,  i.e.,  the 
increase  of  capital. 

The  following  transactions  will  show  this : 

1.  Frank  Munson  began  business  with  $2,000  in  merchandise. 

2.  Sold  merchandise  that  cost  $1,000  for  $1,400  in  cash. 

3.  Bought  merchandise  for  cash  $1,200. 

4.  Sold  merchandise  that  cost  $200  to  A.  C.  Knox  for  $300  on  account. 

5.  Bought  $500  merchandise  from  Ryan  and  Company  on  account. 

107 


io8 


FUNDAMENTALS  OF  ACCOUNTING 


6.  Munson  returned  to  Ryan  and  Company  the  S500  merchandise  bought 

from  them  (item  5),  because  it  was  of  inferior  grade. 

7.  A.  C.  Knox  returned  all  the  merchandise  sold  him  (item  4),  because  it 

was  not  what  he  ordered. 

With  the  account  titles  formerly  used,  the  above  information 
in  the  expanded  equation  would  appear  as  follows: 


Cash 


Increases 
(2) $1,400 


Decreases 


(3) 


Merchandise 


Increases 


(1)  Inventory $2,000 

(3)  Purchases 1,200 

(5)  Purchases 500 

(7)  Returned  Sale  (item  4)  200 

3.900 


Decreases 


Accounts  Receivable 


Increases 
(4)  A.  C.  Knox 


$300 
Accounts  Payable 


Decreases 


(7)  Returned    by    A.    C. 
Knox  (item  4) 


Decreases 

(6)  Returned  to  Ryan  and 

Company  (item  5) .  .     $500 

Frank  Munson's  Capital 
Decreases 

(7)  (Item  4) $IOO 


Increases 
(5)  Ryan  and  Company 


Increases 


Si,  200 


(2)  Cost  of  goods  sold. ..  .     $1,000 
(4)  Cost  of  goods  sold  .  .  .  200 

(6)  Returned  Purchases 
(item  5) 


500 
1,700 


$300 


$500 


(o $2,000 

(2)  Profit 400 

(4)  Profit IOO 


The  handling  of  the  first  five  items  has  already  been  explained 
in  Chapter  IX.    Number  6  has  the  effect  of  reversing  item  5. 


EXPANSION  BY  SUBSTITUTION  109 

The  return  of  the  goods  decreases  the  asset,  Merchandise,  by 
canceling  the  increase  of  $500  (item  5),  and  since  Munson  no 
longer  owes  Ryan  and  Company  it  also  decreases  the  liability. 
Accounts  Payable,  $500,  as  recorded  on  the  left  of  Accounts  Pay- 
able (item  6).  Number  7  reverses  transaction  4.  Number  4 
recorded  an  increase  of  $300  in  the  asset,  Accounts  Receivable;  a 
decrease  of  $200  in  the  asset,  Merchandise,  and  an  increase  in 
Munson's  Capital  of  $100.  When  Knox  returned  the  merchan- 
dise just  the  opposite  effect  was  produced,  therefore  number  7 
appears  as  a  decrease  in  the  asset,  Accounts  Receivable,  of  $300; 
an  increase  in  the  asset,  Merchandise,  of  $200,  and  a  decrease  in 
Munson's  Capital  of  $100. 

You  have  no  doubt  observed  that  the  Merchandise  title  con- 
tains three  items  of  information,  viz.,  Inventory,  or  Stock,  of 
Merchandise  at  the  beginning  of  the  period,  Purchases,  or  in- 
creases during  the  period,  and  Sales,  or  decreases  during  the 
period.  These  last  two  are  subject  to  corrections  because  goods 
are  returned  by  or  to  us,  and  therefore  the  total  Purchases  and 
Sales  are  not  easily  obtained. 

Since  the  three  titles  provide  a  more  convenient  device  than 
the  single  one,  let  us  expand  Merchandise  into  Merchandise 
Inventory,  Merchandise  Purchases,  and  Merchandise  Sales.  The 
three,  however,  as  a  group  still  represent  Merchandise. 

The  Merchandise  title  is  shown  on  page  108  in  its  original 
form.  The  three  titles  which  have  been  substituted  for  it  are 
given  below : 


Merchandise  Inventory 


Increases  in  assets 

(1) $2,000 

Merchandise  Purchases 


Decreases  in  assets 


Increases  in  assets 

(3) $1,200 

(5) 500 


Decreases  in  assets 

(6)  Returned  to  Ryan 
and  Company  (item 
5) $S°o 


110  FUNDAMENTALS  OF  ACCOUNTING 

Merchandise  Sales 


Increases  in  assets 

(7)  Returned    by    A.    C. 

Knox  (item  4) $200 


Decreases  in  assets 

(2)  Cost  of  goods  sold  ...  .     $1,000 
(4)  Cost  of  goods  sold  ...  .  200 


Summarizing  the  Equation. — Combining  the  information 
found  under  the  titles,  Cash  and  Frank  Munson's  Capital,  with 
the  three  Merchandise  titles  above,  we  have  the  following: 

Statement  of  Assets,  Liabilities,  and  Capital 
Date 


Assets : 

Cash  (excess  of  increases  over  decreases) $    200 

Merchandise  (excess  of  increases  over  decreases) 2,200 

(Inventory, $2,000  +  net  Purchases,  $1,200  =  $3,200) 
($3,200—  net  Sales  at  cost,  $1,000  =  $2,200) 


Total $2,400 

Liabilities: 
None o 


Capital  (excess  of  increases  over  decreases) $2,400  - 


This  capital  is  verified  by  deducting  liabilities  from  assets. 

Frank  Munson 
Statement  Showing  Sources  of  Increases  and  Decreases  in 

Capital 
from to 19 — 


Increases: 

Profit  on  sale  of  merchandise  (item  2) $400  - 

Profit  on  sale  of  merchandise  (item  4) 100  - 

Total $500 

Decreases : 
Profit  on  sale  of  merchandise  returned  (item  7) 
when  accounts  receivable  was  decreased  $300 

and  merchandise  was  increased  $200 100  - 

Net  Increase  in  Capital $4oo 


EXPANSION  BY  SUBSTITUTION 


III 


Explanation  of  Frank  Munson's  Capital 
Date 


Investment  at  beginning $2,000 

Add  Net  Increase  in  Capital 400 

Capital  at  the  end $2,400 


Finding  Profits  in  Totals. — In  most  businesses  it  is  not  con- 
venient and  does  not  add  to  our  information  to  find  the  profit 
(increase  in  capital)  at  the  time  of  sale  on  each  article  sold.  The 
information  desired  is  the  total  profit  on  sales  for  a  month  or 
year.  Again,  the  cost  of  determining  the  profit  on  each  sale 
would  more  than  absorb  or  offset  the  profit,  making  this  plan 
impracticable.  For  example,  a  retail  merchant  selling  thread  by 
the  spool  at,  say,  6  cents  per  spool  with  a  cost  of  5  9/10  cents  per 
spool  would  produce  a  profit  of  1/10  cent.  In  recording  this,  we 
indicate  correctly  the  effect  of  the  transaction  on  assets  and 
capital,  as  follows : 


Cash 


Increase  in  assets 


6i 


Merchandise  Sales 

Decrease  in  assets 


Capital 


Increase  in  capital 


5  9/io^ 


i/ioff 


But  the  time  consumed  and  the  inconvenience  of  using  fractions 
of  a  cent  more  than  obviate  the  benefits  of  correct  recording. 
Since  decrease  in  assets  and  increase  in  capital  are  both 


112 


FUNDAMENTALS  OF  ACCOUNTING 


entered  on  the  right  side  of  the  equation,  we  may  record  both 
under  the  title,  Merchandise  Sales,  as  a  single  item,  thus: 


Cash 


Increase  in  assets 


$.06 

Merchandise  Sales 


Decrease   in   assets 

and 
Increase  in  capital 


$.06 


If  10,000  articles  were  sold,  the  conditions  might  be  stated 


thus: 


Cash 


Increase  in  assets 


Merchandise  Sales 


This  represents: 
{Decrease  in  assets  $590 
\  and 

[  Increase  in  capital         10 


In  many  retail  concerns  the  salesmen  do  not  know  the  cost 
price  of  the  articles  they  sell,  thus  making  it  more  convenient  to 
use  the  selling  price  instead  of  the  cost  price  in  recording  sales. 

Removing  the  Profit. — If  the  amount  of  profit  on  all  the  sales 
is  known,  it  may  be  transferred  to  capital  as  follows : 

Merchandise  Sales 

To  Capital $10 $600 

Capital 

I  I  From  Sales $10 


EXPANSION  BY  SUBSTITUTION 


113 


By  entering  the  item  of  $10  Profit  on  the  left  side  of  Mer- 
chandise Sales  we  leave  the  difference  $590  as  the  cost  of  the  goods 
sold  (decrease  in  assets)  on  the  right  side,  and  by  entering  $10 
on  the  right  of  Capital  we  indicate  the  increase  in  capital  from 
the  profit  on  all  sales.  Another  plan  is  to  enter  on  the  left  side  of 
Merchandise  Sales  the  cost  of  the  goods  sold,  leaving  on  the  right 
side  the  profit  (difference  between  sales  of  $600  and  cost  of  $590), 
which  may  then  be  transferred  to  Capital  in  the  usual  manner. 

Merchandise  Sales 

(Cost  5oo,Profit  10) $600 


Cost  of  goods  sold $590 

Profit 10 


Capital 

Profit  on  Sales . 


$10 


We  shall  now  carry  out  a  series  of  transactions  to  show  the 
source  of  the  profit  and  how  it  is  transferred  to  capital. 

1.  John  Smith  began  business  with  $1,000  in  cash. 

2.  Bought  merchandise  for  cash  $1,000. 

3.  Sold  all  the  merchandise  for  $1,200  in  cash. 

Trace  these  by  number  to  the  following  equation : 

Cash 


Increases 

(1) $1,000 

(3) J^oo 

Merchandise  Purchases 
Increases 

(2) $1,000 

Merchandise  Sales 


Decreases 
(2). $1,000 


Decrease  in  assets 

and 
Increase  in  capital 


(3) 


$1,200 


ii4 


FUNDAMENT  ALS  OF  ACCOUNTING 
John  Smith's  Capital 


Increases 
(i) $1,000 

The  equation  below  shows  the  same  information  and  in 
addition  shows  transactions  4  and  5  which  transfer  the  profit  to 
capital. 

Cash 

(1) $1,000       (2) $1,000 

(3) l>2°° 

Merchandise  Purchases 

(4)  Transfer    to  Sales 

(cost  of  goods  sold)    $1,000 

Merchandise  Sales 


(2) $1,000 


>I,200 


(4)  From  Purchases $1,000 

(5)  Profit  transferred  to 

Capital 200 

John  Smith's  Capital 

(1) $1,000 


(3) 


(5)  Profit  from  Sales . 


200 


Transaction  4  indicates  the  transfer  of  the  cost  of  goods  sold 
from  Merchandise  Purchases  to  Merchandise  Sales,  and  transac- 
tion 5  transfers  the  increase  in  capital  from  Merchandise  Sales 
to  John  Smith's  Capital. 

Combining  Titles  and  Determining  Profits. — For  convenience 
in  finding  profit  the  information  collected  during  the  period  under 
the  above  titles  is  transferred  at  the  end  of  the  period  to  the  title, 
Trading  in  Merchandise,  or  simply,  Trading. 

Let  us  illustrate  this  by  the  following  transactions. 

1.  Charles  Welsh  began  business  with  $3,000  in  merchandise. 

2.  Sold  merchandise  for  cash  $2,500. 

3.  Bought  merchandise  for  cash  $1,500. 


EXPANSION  BY  SUBSTITUTION  115 

After  recording  these  transactions  the  equation  appears : 

Cash 

(2) $2,500  I  J  (3) $1,500 

Merchandise  Inventory 

(1) $3,000  I 

Merchandise  Purchases 

(3) $1,500  I 

Merchandise  Sales 

(2) $2,500 

Charles  Welsh's  Capital 

(1) $3,000 

To  determine  the  amount  of  profit  we  transfer  the  differences 
in  each  merchandise  title  to  the  title,  Trading  in  Merchandise. 
The  separate  steps  needed  to  make  the  transfer  are  listed  by 
number  below. 

4.  The  transfer  of  Merchandise  Inventory  to  Trading  in  Merchandise, 
$3,000. 

5.  The  transfer  of  Merchandise  Purchases  to  Trading  in  Merchandise, 

$1,500. 

Steps  4  and  5  are  taken  for  the  purpose  of  finding  the  total 
amount  of  the  goods  available  for  sale.  This  amount,  $4,500,  is 
composed  of  the  original  inventory  of  $3,000  and  the  purchase 
of  $1,500,  these  items  now  being  brought  together  on  the  left  side 
of  the  title,  Trading  in  Merchandise. 

6.  The  transfer  of  the  amount  of  goods  remaining  on  hand  unsold, 
$2,500,  from  Trading  in  Merchandise  to  Merchandise  Inventory. 

The  effect  of  this  transfer  is  to  separate  into  two  parts  the 
$4,500  of  goods  available  for  sale.  One  of  these  parts  represents 
the  unsold  portion,  $2,500,  just  referred  to,  which  now  appears  on 
the  left  side  of  Merchandise  Inventory.  The  other,  $2,000,  repre- 
sents the  cost  of  goods  sold  and  is  now  indicated  by  the  excess  of 


n6 


FUNDAMENTALS  OF  ACCOUNTING 


the  left  side  of  Trading  in  Merchandise,  $4,500,  over  the  right 
side,  $2,500  ($4,500  —  $2,500  =  $2,000). 

7.  The  transfer  of  Merchandise  Sales  to  Trading  $2,500. 

8.  The  transfer  of  profit  (increase  in  capital)  to  Capital  $500. 

After  the  above  transfers  have  been  made  the  equation 
appears  as  follows : 

Cash 


(2) $2,500 


(3) 


Merchandise  Inventory 


(1) 


5,000 


(6)  Transferred     from 

Trading $2,500 

Merchandise  Purchases 


(4)  Transferred  to  Trad- 
ing   


'1,500 


5,000 


(3) 


$1,500 


(5)  Transferred     to 

Trading $1,500 


Merchandise  Sales 


(7)  Transferred  to  Trad- 
ing      $2,500 


(2) $2,500 


Trading  in  Merchandise 

(4)  Merchandise    Inven- 

tory      $3,000 

(5)  Merchandise    Pur- 

chases        r,50o 


$4,Soo 


Difference    (cost  of 

goods  sold) $2,000 

(8)  Profit  transferred  to 

Capital 5oo 

$2,500 


(6)  Inventory  at  end.  .  .     $2,500 
Difference    equals 
cost  of  goods  sold .       2,000* 


,500 


(7)  Sales .     $2,500 


$2,500 


*aZZ  f-°£  th[s  ex?ess  as  a  separate  item,  the 


T^^^S^S"^^^U&-^^S^^ the  right  of 

inis  device  or  method  of  balancing  ,s  used  when  it  is  desired  to  show  as  "  separate  item 


EXPANSION  BY  SUBSTITUTION  117 


Charles  Welsh's  Capital 


(i) $3,000 

(8)  Profit     transferred 

from  Trading 500 


The  information  now  contained  in  the  equation  may  be 
summarized  as  follows: 

Charles  Welsh 
Statement  of  Assets,  Liabilities,  and  Capital 
Date 


Assets: 

Cash $  1 ,000  - 

Merchandise 2,500  - 

Total $3,500- 

Liabilities: 
None o  - 

Capital $3,500  - 


Finding  the  Cost  of  Goods  Sold. — Out  of  the  difficulty  and 
impracticability  of  keeping  record  of  the  cost  of  each  article  sold 
has  come  the  method  of  recording  at  sales  prices  all  sales  as  they 
are  made.  As  shown  in  the  equation  on  page  114  this  makes 
necessary  the  transfer  at  some  time  of  the  profit  from  the  Sales 
title  to  the  Capital  title.  This  is  not  done  as  each  sale  is  recorded, 
but  only  at  the  end  of  the  business  year  or  other  period  when  the 
merchant  desires  to  sum  up  his  business  for  the  year  and  deter- 
mine his  condition.     Before  he  can  do  this  he  must  find  the  cost 


the  difference  between  the  tw  o  sides  of  a  record.  The  side  on  which  the  lesser  amount  appears 
is  made  equal  to  the  other  side  by  entry  in  it  of  the  difference  between  them.  The  two  sides 
are  now  said  to  balance  and  are  totaled  and  ruled  off.  The  amount  of  the  excess,  entered  on 
the  lesser  side  to  make  the  two  sides  "balance,"  is  now  set  up  below  the  totals  on  the  side 
which  was  originally  the  larger.  The  student  will  appreciate  that  no  real  change  has  been 
made  in  the  record,  for  equal  amounts — $2,000  in  this  case — have  been  added  to  both  sides. 
Then  from  each  side  of  the  record  equal  amounts — $4,500  in  the  above  example — have  been 
ruled  off  or  out  of  the  record.  This  leaves  in  it  just  the  one  distinct  and  separate  item,  the 
amount  of  excess  of  one  side  of  the  original  record  over  the  other. 


118  FUNDAMENTALS  OF  ACCOUNTING 

of  the  goods  he  has  sold.  While  no  record  has  been  kept  of  the 
cost  of  each  article  sold,  the  merchant  does  keep  a  record  of  the 
amount  of  goods  he  has  available  for  sale.  This  is  composed 
of  the  goods  on  hand  at  the  beginning  and  the  goods  he  has 
bought  since.  He  must  account  for  all  of  these.  Some  he  has 
sold;  the  rest  he  should  have  on  hand  unsold.  Using  the  terms 
"Initial  Inventory"  and  "Final  Inventory"  for  these  items, 
we  may  express  this  accounting  in  the  form  of  the  equation  which 
follows : 

Initial  Inventory  +  Purchases  =  Final  Inventory  +  Cost  of  Goods  Sold 

The  left  side  of  this  equation  is  known,  since  a  record  has  been 
kept  of  both  items.  Neither  of  the  right-hand  members  is  known. 
The  merchant  must  therefore  find  the  amount  of  either  one  of 
these.  The  difficulties  in  finding  the  Cost  of  Goods  Sold  have 
already  been  referred  to.  It  is  not  difficult,  however,  once  a 
year — or  oftener — to  find  the  amount  of  the  Final  Inventory  by 
making  an  actual  count  of  the  merchandise  unsold  in  the  store,  as 
explained  in  Chapter  V.  With  this  information  it  is  now  pos- 
sible to  determine  the  Cost  of  Goods  Sold,  the  remaining  un- 
known quantity  in  the  above  equation,  sometimes  called  the 
"Cost  of  Goods  Sold  equation." 

This  information  when  expressed  in  statement  form  will 
appear  as  follows,  using  the  figures  of  the  Charles  Welsh 
problem : 

i.  Inventory  at  beginning $3,000  - 

2.  Plus  Purchases 1 ,500  - 

3.  Equals  total  cost  of  merchandise  available  for  sale. . .     $4,500  - 

4.  Less  Inventory  at  end  of  period 2,500  - 

5.  Leaves  cost  of  goods  sold $2,000  - 


Finding  the  Profit.  —After  the  determination  of  the  cost  of 
goods  sold  (amount  of  decrease  in  the  asset,  merchandise)  it  is  a 


EXPANSION  BY  SUBSTITUTION  IIP 

simple  matter  to  find  the  amount  of  profit.  Either  of  the  two 
forms  below  may  be  used  for  this  purpose.  The  first  shows  the 
information  in  statement  form;  the  second  in  the  form  of  the 
vertical  equation. 

Statement  Form 

i.  Sales  (Decrease  in  Assets  +  Increase  in  Capital) $2,500  - 

2.  Less  Cost  of  Goods  Sold  (Decrease  in  Assets) 2,000  - 

3.  Leaves  Profit  (Increase  in  Capital) $    500  - 


Cost  of  Goods  Sold $2,000 

Profit 500 


Vertical  Equation  Form 

Merchandise  Sales $2,500 


$2,500 


$2,500 


Referring  again  to  the  expanded  equation  on  page  116,  note 
that  it  contains  all  the  information  which  has  just  been  shown  in 
the  statement  of  assets,  liabilities,  and  capital,  in  the  statement 
showing  the  cost  of  goods  sold,  and  in  that  showing  the  profit. 
After  transferring  this  period's  information  from  Merchandise 
Inventory  (initial  inventory),  Merchandise  Purchases,  and  Mer- 
chandise Sales,  these  titles  can  be  used  for  recording  merchandis- 
ing information  during  the  next  period.  The  records  for  the  two 
periods  will  thus  be  separate  and  distinct,  the  double  horizontal 
lines  clearly  dividing  them. 

Expanding  the  Expense  Title. — Under  the  general  title, 
Expense,  have  up  to  this  time  been  recorded  the  increases  and 
decreases  of  all  expense  purchases  consumed  quickly  in  opera- 
ting the  business.  This  is  not  usually  sufficiently  definite, 
because  it  does  not  furnish  detailed  information  in  regard  to  in- 


120 


FUNDAMENTALS  OF  ACCOUNTING 


creases  and  decreases  in  the  different  kinds  of  expense  purchases 
making  up  this  group. 

We  shall  now  substitute  for  the  general  title,  Expense,  the 
names  of  the  different  kinds  of  items  composing  it.  There  may 
be  any  number  of  names  for  the  different  items,  but  a  study  of 
some  typical  ones,  such  as  Rent,  Salaries,  Stationery  and  Print- 
ing, Insurance,  and  Postage  Stamps,  will  be  sufficient  to  show  how 
the  substitution  is  accomplished.  In  the  illustration  below,  the 
various  items  are  first  recorded  under  the  title,  Expense,  and 
then  the  same  information  is  shown  in  more  expanded  form  by 
substituting  the  several  separate  titles. 


Expense 


Increases 

Rent $   300 

Salaries 1,500 

Stationery  and  Printing . .  50 

Insurance 60 

Postage  Stamps 20 

Miscellaneous 200 


Decreases 


Substituting  for  the  general  title,  Expense,  the  names  of  the 
different  kinds  of  items  which  compose  it,  we  have  the  follow- 
ing: 


Increases 


Increases 


Rent 

$300 
Salaries 


Decreases 


Decreases 


3.1,500 
Stationery  and  Printing 


Increases 


Decreases 


$50 


EXPANSION  BY  SUBSTITUTION 
Insurance 


121 


Increases 


Increases 


Decreases 


Postage  Stamps 


$20 
Miscellaneous  Expense 


Decreases 


Increases 


$200 


Decreases 


Usually  only  the  more  important  items  are  given  separate 
titles  and  the  general  term,  Expense,  is  retained  for  miscellaneous 
items,  such  as  carfares,  papers,  telephone  and  telegrams,  small 
donations  to  charity,  etc. 

The  manner  of  handling  these  detailed  expense  records  is 
exactly  the  same  as  that  of  the  regular  asset  records.  Entries 
on  the  left  indicate  increases,  and  those  on  the  right  decreases. 
The  right-hand  entries  indicate  the  portions  of  the  expense  pur- 
chases consumed  in  operating  the  business  and  are,  therefore, 
decreases  in  capital.  As  explained  in  Chapter  VI,  page  62, 
however,  these  are  treated  as  deductions  from  Gross  Profit  be- 
fore being  transferred  to  the  Capital  record  where  only  the  net 
amount  representing  the  net  increase  or  decrease  in  capital  re- 
sulting from  the  period's  operations  will  appear.  If  all  of  an 
expense  purchase  is  n\)t  used  up  in  one  period,  the  part  remaining 
is  an  inventory  or  balance,  to  be  shown  as  still  on  hand  for  the 
next  period.  At  the  end  of  the  current  period  this  balance  is  a 
true  expense  asset,  representing  unused  expense  purchases.  An 
illustration  will  bring  out  these  points  more  clearly. 

Referring  to  the  example  above,  assume  that  $200  of  the  Rent 
(right  to  use  the  building)  has  been  consumed.  The  method  of 
transferring  the  part  consumed  is  shown  in  the  Rent  record  as 
follows: 


122 


FUNDAMENTALS  OF  ACCOUNTING 
Rent 


Increases 


$300 


Decreases 

Transferred  to  Capital $200 

(Representing  part  of 
purchase  consumed) 

Balance 100 

(Representing  inventory 
or  part  held  over  for 
consumption  next  year) 


$300 
Balance  (inventory) $100 


If  all  of  the  expense  purchase  has  been  consumed,  this  is 
shown  as  indicated  below  in  the  Salaries  record. 

Salaries 


Increases 


$1,500 


Decreases 
Transferred  to  Capital.  . .     $1,500 


(Representing  expense 
purchases  consumed 
in  operating  the  busi- 
ness) 


Summarizing  Increases  and  Decreases  in  Capital. — In  the 
above  illustrations  the  portions  of  the  expense  purchases  con- 
sumed are  shown  transferred  to  Capital.  Instead  of  transferring 
them  direct  to  Capital  it  is  customary  to  summarize  them  under 
another  title,  Profit  and  Loss,  to  which  is  also  transferred  the 
gross  profit  on  sales.  This  summary  title  represents  a  net  in- 
crease or  net  decrease  in  capital  (Net  Profit  or  Net  Loss)  which 
is  transferred  to  the  Capital  title  as  a  single  item. 

The  following  illustration  shows  the  manner  of  handling  the 
Profit  and  Loss  title.    The  left-hand  items  represent  expense 


EXPANSION  BY  SUBSTITUTION 


123 


purchases  consumed  and  transferred  from  their  individual  titles. 
The  right-hand  item  represents  gross  profit  transferred  from 
Trading  in  Merchandise.  Profit  and  Loss  is  a  temporary  capital 
title  used  solely  for  the  purpose  of  summarizing  these  capital 
changes  before  the  more  permanent  record  is  made  in  the  Capital 
title.  The  balance,  i.e.,  the  difference  between  the  two  sides,  is 
always  transferred  to  Capital. 


Profit  and  Loss 


Decreases  in  Capita 

r 

Increases  in  Capital 

Transferred  from  Rent . . . 

$    200 

Transferred  from  Trading    $3,000 

"    Salaries 

i,5o° 

"              "    Station- 

ery and  Printing 

40 

Transferred   from   Insur- 

ance   

5° 

Transferred  from  Postage 

Stamps 

10 

Transferred  from  Miscel- 

laneous Expense 

200 

Total 

$2,000 

Net  Profit  transferred  to 

Capital 

1,000 

$3,000 

$3,000 

Capital 


Decreases 


Increases 


Original 

Net  Profit  transferred 
from  Profit  and  Loss. . . 


1,000 


It  is  obvious  that  the  net  effect  on  capital  of  the  operations 
during  the  period  is  more  clearly  indicated  by  the  use  of  the 
Profit  and  Loss  title  than  by  transferring  each  change  to  Capital 
individually. 


124  FUNDAMENTALS  OF  ACCOUNTING 

It  now  remains  to  apply  in  a  series  of  transactions  all  the  new 
principles  explained  in  this  chapter.  A  series  of  business  trans- 
actions is  recorded  under  appropriate  titles.  The  result  of  the 
transactions  is  then  summarized  and  transferred  to  Capital. 
The  student  should  trace  carefully  each  one  of  the  transactions 
by  number  to  the  titles  affected  in  the  equation. 

i.  William  Winton  began  business  with  $7,000  in  cash  and  $3,000  in 
merchandise. 

2.  Bought  merchandise  from  E.  Z.  Dunn,  on  account,  $5,000. 

3.  Bought  store  and  office  furniture  and  fixtures  for  cash  $1,500. 

4.  Paid  cash  $50  for  stationery  and  other  printed  matter  for  use  in 
office  and  store. 

5.  Paid  $200  in  cash  in  advance  for  one  month's  rent. 

6.  Sold  merchandise  for  cash  $2,200. 

7.  Returned  merchandise  to  E.  Z.  Dunn  (see  item  2)  as  not  being  up 
to  grade,  $100. 

8.  Sold  merchandise  to  Henry  Bates,  on  account,  $4,000. 

9.  Paid  clerks'  salaries  in  cash  $150. 

10.  Henry  Bates  returned  $200  of  the  merchandise  sold  to  him  (see 
item  8)  because  it  was  not  what  he  ordered. 

The  following  numbers  have  reference  to  the  summarizing  transactions. 

11.  Initial  Inventory  of  Merchandise  transferred  to  Trading  $3,000. 

12.  The  balance  of  Merchandise  Purchases  transferred  to  Trading 
$4,900. 

13.  The  present  inventory  of  merchandise  is  found  to  be  $3,500.  This 
was  obtained  by  listing  all  unsold  merchandise  and  valuing  it  at  cost  or 
market  price,  whichever  was  lower.  Transferred  to  Merchandise  Inven- 
tory. 

14.  Balance  of  Trading  which  represents  the  cost  of  the  merchandise 
sold  is  $4,400.  This  results  from  merely  deducting  item  13,  cost  of  mer- 
chandise unsold  (inventory)  from  the  left  side,  the  total  of  which,  $7,900, 
consists  of  cost  of  merchandise  sold  and  cost  of  merchandise  unsold. 

15.  The  balance  of  Merchandise  Sales  transferred  to  Trading  $6,000. 

16.  The  Gross  Profit  (gross  increase  in  capital)  transferred  to  the 
Profit  and  Loss  summary  title  $1,600. 

17.  It  is  estimated  that  $40  of  the  Stationery  and  Printing  has  been 
consumed  in  conducting  business.  This  was  obtained  by  listing  or  es- 
timating all  the  unconsumed  material  at  cost,  making  the  present  Inven- 


EXPANSION  BY  SUBSTITUTION 


125 


tory  $10.  Since  there  is  no  element  of  profit  to  be  considered,  the  simplest 
way  to  treat  this  title  is  to  remove  the  amount  of  this  item  which  has  been 
consumed,  $40. 

18.  The  balance  of  the  Stationery  and  Printing  title  stated  in  a  single 
amount  is  $10  and  is  called  an  Inventory.    It  is  an  expense  asset. 

19.  Since  all  the  expense  purchase  represented  by  the  title,  Rent  (right 
to  use  the  building),  has  been  consumed,  the  whole  amount,  $200,  is  trans- 
ferred to  Profit  and  Loss. 

20.  All  of  theitem,  Salaries  (services  of  the  clerks  and  other  employees), 
has  been  consumed.  Therefore  the  total  in  this  title,  $150,  represents  a 
decrease  in  capital  and  is  transferred  to  Profit  and  Loss. 

21.  The  balance  of  Profit  and  Loss  representing  the  excess  of  increases 
over  decreases  in  capital  (Net  Profit)  is  transferred  from  Profit  and  Loss 
to  Winton's  Capital  $1,210. 


Cash 


( 1  ) $7  000 

(6) 2,200 


(3) $i,Soo 

(  4  ) 50 

(  5  ) 200 

(9) ISO 


Merchandise  Inventory 


(O 


5,000 


(n)Trading. 


j  ,000 


(i3)Trading $3,500 

Merchandise  Purchases 
(2  ) $5,000 


$5, 000 


(  7  ) $    100 

(12)  Trading 4,900 


;,ooo 


Merchandise  Sales 


(10) $    200 

(15)  Trading 6,000 

$6,200 


(6) 
(8) 


$2,200 
4,000 

$6,200 


126  FUNDAMENTALS  OF  ACCOUNTING 

Furniture  and  Fixtures 

(3) $1,500 


(4) 


Stationery  and  Printing 
....     $     50 


$     50 


(18)  Balance, Inventory..     $      10 


(17)  Profit  and  Loss 

(18)  Balance, Inventory.. 


$      40 
10 

$      50 


Rent 


(5) 


$200 


(19)  Profit  and  Loss $    200 


Accounts  Receivable 


(  8  )  Henry  Bates. 


|.,ooo 


(10)  Henry  Bates $200 


Salaries 


(9) $    JSo 


(20)  Profit  and  Loss $    150 


(  7  )  E.  Z.  Dunn. 


Accounts  Payable 
...     $    100        (  2  )  E.  Z.  Dunn 
Trading  in  Merchandise 
(11)  Merchandise  Inven- 


tory      $3,000 

(12)  Merchandise    Pur- 
chases         4,900 


$7,900 

(14)  Balance  equals  cost 

of     Merchandise 

sold $4,400 

(16)  Profit  and  Loss 1,600 

$6,000 


(13)  Merchandise  Inven- 

tory (new) 

(14)  Balance  equals  cost 

of. Merchandise 

sold 


(15)  Merchandise  Sales . 


;,ooo 


i,500 


4,400 


$7,900 


),ooo 


),ooo 


EXPANSION  BY  SUBSTITUTION  127 


Profit  and  Loss 


(17)  Stationery    and 

Printing $      40 

(19)  Rent 200 

(20)  Salaries 1 50 

(21)  To  Capital 1,210 


$1,600 


(16)  Profit  on  Trading .. .     $1,600 


$1,600 


William  Winton's  Capital 

(1)   $10,000 

(21)  Profit  and  Loss 1,210 

The  Equation  in  Statement  Form. — The  information  in  the 
equation  in  regard  to  the  assets,  liabilities,  and  capital  of  William 
Winton  and  the  sources  of  the  increases  and  decreases  in  his 
capital  may  be  presented  in  statements  much  more  compact  and 
easier  to  read,  especially  for  the  man  who  is  not  familiar  with 
accounting.  Let  it  be  assumed  that  the  transactions  took  place 
during  the  period  from  March  1  to  31,  19 — . 

William  Winton 

Statement  of  Assets,  Liabilities,  and  Capital 

March  31,  19 — 


Assets: 

Cash $  7,300  - 

Merchandise 3,5°°  - 

Furniture  and  Fixtures i,5°°  - 

Stationery  and  Printing 10  - 

Accounts  Receivable 3,800  - 

Total  Assets $16,110- 

Liabilities : 

Accounts  Payable $  4,900  - 

Total  Liabilities 4,9°°  - 

Capital: 

Wm.  Winton's  Capital  (Original) $10,000  - 

Plus  Net  Increase  (Net  Profit) 1,210  - 

Total  Capital $11,210- 


128  FUNDAMENTALS  OP  ACCOUNTING 

William  Winton 

Statement  of  Profit  and  Loss 

from  March  i  to  31,  19 — 


Sources  of  Increases  in  Capital: 

Sales $6,000 

Deduct:  Cost  of  Goods  Sold 

Purchases $5>°°°  ~ 

Less:  Returns 100  - 

Net  Purchases $4,9°°  ~ 

Add:  Inventory  3/1/ — 3>°°°  ~ 

Cost  of  goods  available  for  sale $7,9°°  ~ 

Less:  Inventory  3/31/ — 3>5°°  ~ 

Cost  of  Goods  Sold 4,400 


Gross  Profit  on  Sales $1,600 

Sources  of  Decreases  in  Capital: 

Rent  consumed $    200  - 

Salaries  consumed 15°  ~ 

Stationery  and  Printing  consumed 40  - 

Total 39o 


Net  Profit  (Net  Increase  in  Capital) $1,210 


Note  that  the  title  of  this  statement  has  been  changed. 
Profit  and  Loss  is  but  another  name  for  increases  and  decreases 
in  capital.  This  title  is  more  in  accord  with  that  used  in  the 
vertical  equation  to  show  increases  and  decreases  of  capital  and 
as  its  use  is  general  in  business,  we  shall  use  it  in  the  future. 

Questions 

1.  What  is  meant  by  "expansion  by  substitution?" 

2.  What  titles  are  substituted  for  the  title,  Merchandise?    Illustrate. 

3.  (a)  Discuss  the  disadvantages  of  finding  the  profit  on  each  sale  at 
the  time  the  sale  is  made,     (b)  How  may  the  disadvantages  be  overcome? 


EXPANSION  BY  SUBSTITUTION 


129 


4.  What  is  the  purpose  in  setting  up  the  Trading  in  Merchandise  title? 

5.  Into  what  two  parts  may  the  "total  cost  of  goods  available  for 
sale"  be  divided? 

6.  Explain  how  to  find  the  cost  of  the  goods  sold  in  the  Trading  in 
Merchandise  title. 

7.  Into  what  two  parts  may  the  selling  price  be  divided? 

8.  How  is  the  increase  in  capital  transferred  from  the  Trading  in  Mer- 
chandise title  to  the  Profit  and  Loss  title? 

9.  Show  how  you  would  find  the  cost  of  goods  sold  arithmetically. 

10.  What  is  the  "key"  to  the  solution? 

11.  At  what  price  should  inventories  of  merchandise  be  entered  when 
finding  the  cost  of  goods  sold?     Why? 

12.  Indicate  by  means  of  skeleton  titles  the  steps  taken  to  find  the 
gross  profit  on  sales. 

13.  What  is  the  purpose  of  substituting  several  special  titles  for  the 
general  title  of  Expense? 

14.  Explain  the  purpose  of  the  Profit  and  Loss  title. 

15.  What  is  meant  by  "net  profit?" 

16.  (a)  What  information  does  a  profit  and  loss  statement  contain?  (b) 
Where  may  this  information  be  found  in  the  equation  after  closing? 

Problems 

1.  (a)  Expand  the  following  Merchandise  title  by  substituting  the 
titles,  Merchandise  Inventory,  Merchandise  Purchases,  and  Merchandise 
Sales. 

Merchandise 


(1)  Inventory  at  beginning  $1,000 

(3)  Purchases 4,000 

(4)  Returned  Sale  (item  2)  300 
(6)  Purchases 2,000 


(2)  Cost  of  goods  sold .  . . 

(5)  Cost  of  goods  sold .  . . 

(7)  Returned      Purchase 

(item  6) 


(b)  Find  the  present  inventory. 


F    800 
3,000 

200 


2.  (a)   Record  the  following  transactions  in  equation  form,  using 
Merchandise  Purchases  and  Merchandise  Sales  titles. 

1.  William  White  began  business  with  $5,000  in  cash. 

2.  Bought  merchandise  for  cash  $4,000. 

3.  Sold  all  the  merchandise  for  $5,100  in  cash. 


130  FUNDAMENTALS  OF  ACCOUXTIXG 

(b)  Close  the  Merchandise  Purchases  and  Merchandise  Sales  titles  and 
transfer  the  profit  to  Capital. 

3.  (a)  Record  the  following  transactions  in  the  expanded  equation 
form.  The  figures  after  each  title  indicate  the  number  of  lines  to  allow. 
Cash  4,  Merchandise  Inventory  4,  Merchandise  Purchases  3,  Merchandise 
Sales  3,  Trading  in  Merchandise  7,  Walter  Elliott,  Capital  4. 

1.  Walter  Elliott  began  business  with  $1,000  in  merchandise  and  $4,000 

in  cash. 

2.  Bought  merchandise  for  cash  $3,000. 

3.  Sold  merchandise  for  cash  $4,Soo. 

(b)  Open  a  Trading  in  Merchandise  title  and  find  the  cost  of  goods  sold, 
if  the  cost  of  goods  unsold  amounts  to  $500. 

(c)  Find  the  gross  profit  on  sales  and  transfer  it  to  Capital. 

(d)  Prepare,  in  arithmetical  form,  a  statement  showing: 

1.  The  cost  of  the  goods  sold. 

2.  The  gross  profit  on  sales. 

4.  (a)  Record  in  expanded  equation  form.  Allow  the  following 
number  of  lines  for  each  title:  Cash  5,  Merchandise  Inventory  4,  Mer- 
chandise Purchases  5,  Merchandise  Sales  5,  Trading  in  Merchandise  8, 
L.  E.  Strong,  Capital  4. 

1.  L.  E.  Strong  began  business  with  $2,000  in  merchandise  and  $5,000 

in  cash. 

2.  Bought  merchandise  for  cash  $4,000. 

3.  Sold  merchandise  for  cash  $5,500. 

4.  Bought  merchandise  for  cash  $3,000. 

5.  Sold  merchandise  for  cash  $3,500. 

(b)  Open  a  Trading  title  and  find  the  cost  of  goods  sold  if  the  inven- 
tory amounts  to  $1,500. 

(c)  Find  the  gross  profit  on  sales  and  transfer  it  to  Capital. 

5.  (a)  Record  in  expanded  equation  form.  Allow  the  following 
number  of  lines  for  each  title:  Cash  5,  Merchandise  Inventory  4,  Mer- 
chandise Purchases  5,  Merchandise  Sales  6,  Accounts  Payable  3,  Trading 
in  Merchandise  8,  A.  C.  Bennett,  Capital  4. 

1.  A.  C.  Bennett  began  business  with  $3,000  in  cash  and  $7,000  in  mer- 

chandise. 

2.  Sold  to  R.  F.  Brown,  for  cash,  merchandise  $4,000. 

3.  Bought  from  U.  S.  Kennedy,  for  cash,  merchandise  $3,500. 


EXPANSION  BY  SUBSTITUTION  131 

4.  Sold  to  Nixon  and  Company,  on  account,  $5,000  in  merchandise. 

5.  Sold  merchandise,  for  cash,  $1,200. 

6.  Bought  from  D.  F.  Clark,  on  account,  $2,200  in  merchandise. 

(b)  The  inventory  is  $5,400.  Use  a  Trading  title  in  finding  the  gross 
profit  on  sales  and  then  transfer  the  profit  to  Capital. 

(c)  Prepare  a  statement  of  assets,  liabilities,  and  capital. 

6.  (a)  Record  in  expanded  equation  form.  The  figures  after  each 
title  indicate  the  number  of  lines  to  allow:  Cash  4,  Merchandise  Inven- 
tory 4,  Merchandise  Purchases  5,  Merchandise  Sales  5,  Accounts  Receiv- 
able 5,  Accounts  Payable  3,  Trading  in  Merchandise  8,  John  Drew, 
Capital  4. 

1.  John  Drew  began  business  with  $4,000  in  cash;  $5,000  in  merchandise, 

and  $300  due  on  account  from  K.  V.  French. 

2.  Sold  merchandise  to  Charles  Howard,  on  account,  $4,500. 

3.  Received  $300  in  cash  from  K.  V.  French.     (See  item  1.) 

4.  Bought  merchandise  from  James  and  Company,  on  account,  $3,000. 

5.  Sold  merchandise  to  Kenny  and  Company,  on  account,  $2,700. 

6.  Paid  James  and  Company  cash,  on  account,  $2,000.     (See  item  4.) 

7.  Bought  merchandise  from  H.  H.  Wright  for  cash  $1,500. 

(b)  The  inventory  is  $4,400.  Transfer  profits  through  Trading  to 
Capital. 

7.  (a)  Expand  the  following  Expense  title  by  substituting  individual 
titles.  Allow  8  lines  for  Profit  and  Loss  and  3  lines  for  each  of  the  other 
titles. 

Expense 


Increases  Decreases 

Rent : $500 

Insurance 100 

Wages 600 

Postage 40 

Stationery  and  Printing ....  150 

Miscellaneous  Expense ....  100 

(b)  Assume  that  $300  of  Rent,  and  $100  of  Stationery  and  Printing, 
and  $75  of  Miscellaneous  Expense  has  been  consumed,  and  that  all  the 
other  assets  have  been  consumed.  Transfer  the  amount  of  the  assets 
consumed  to  Profit  and  Loss. 


132  FUNDAMENTALS  OF  ACCOUNTING 

8.  The  Profit  and  Loss  title  contains  the  following:  Rent  $150; 
Salaries  $1,200;  Insurance  $70;  Stationery  and  Printing  $100;  Stable 
Expense  $300;  Miscellaneous  Expense  $200;  Gross  Profit  from  Trading 
$2,900.  Show  the  items  entered  in  a  Profit  and  Loss  title  and  transfer  the 
net  profit  to  Capital. 

9.  Record  in  expanded  equation  form.  The  figure  after  each  title 
indicates  the  number  of  lines  to  allow:  Cash  6,  Merchandise  Inventory 

4,  Merchandise  Purchases  3,  Merchandise  Sales  6,  Accounts  Receivable  4, 
Rent  6,  Salaries  5,  Stationery  and  Printing  6,  Accounts  Payable  3,  Trading 
in  Merchandise  8,  Profit  and  Loss  7,  Charles  G.  Price,  Capital  4. 

1.  Charles  G.  Price  began  business  with  $4,000  in  cash;  and  $6,000  in 

merchandise. 

2.  Paid  Jones  and  Company  cash,  for  rent,  $500. 

3.  Sold  merchandise  $1,500  to  H.  S.  Daly  on  account. 

4.  Paid  clerks'  salaries  in  cash  $125. 

5.  Bought  merchandise  from  R.  J.  Judson,  on  account,  $2,200. 

6.  Paid  Standard  Printing  Company  in  cash  for  supplies  of  stationery 

and  advertising  matter  $225. 

7.  Sold  merchandise  to  O.  Henry  for  cash  $3,000. 

8.  Paid  clerks'  salaries  in  cash  $125. 

9.  Received  cash  from  H.  S.  Daly  $1,500.     (See  item  3.) 
10.  Sold  merchandise  to  C.  J.  Deming,  on  account,  $1,700. 

(b)  The  inventory  of  merchandise  (amount  on  hand)  is  $4,100.  The 
inventories  of  the  various  expenses  are  as  follows:  rent  $260;  stationery 
and  printing  $175;  all  other  expense  assets  were  consumed.  Transfer  in- 
creases and  decreases  in  capital  through  the  Trading  title  and  Profit  and 
Loss  title  to  Capital. 

10.  (a)  Record  in  expanded  equation  form.  Allow  the  following 
number  of  lines  for  each  title:  Cash  9,  Merchandise  Inventory  4,  Merchan- 
dise Purchases  5,  Merchandise  Sales  6,  Furniture  and  Fixtures  6,  Accounts 
Receivable  5,  Salaries  5,  Expense  6,  Rent  3,  Postage  3,  Accounts  Payable 

5,  Trading  in  Merchandise  8,  Profit  and  Loss  9,  David  Roswell,  Capital  4. 

1.  David  Roswell  began  business  with  the  following  assets  and  liabilities: 

cash  $3,500;  merchandise  $6,500;  furniture  and  fixtures  $1,000; 
claims  on  account  against  James  Baker  $400,  and  B.  A.  Butler  $700. 
He  owed,  on  account,  to  Decker  and  Company  $1,000,  and  L.  E. 
White  $500. 

2.  Paid  Parker  and  Hill  cash  for  rent  $350. 

3.  Bought  merchandise  on  account  from  L.  E.  White  $2,500. 


EXPANSION  BY  SUBSTITUTION  133 

4.  Sold  merchandise  to  A.  C.  Watson  for  cash  $3,300. 

5.  Paid  clerks'  salaries  in  cash  $300. 

6.  Paid  cash  for  miscellaneous  expense  items  $350.     The  word  "mis- 

cellaneous" may  be  omitted  from  the  title,  if  you  so  desire,  using 
only  "expense." 

7.  Sold  merchandise  to  James  Baker,  on  account,  $2,700. 

8.  Paid  cash  to  L.  E.  White  for  amount  owed  to  him  at  the  beginning 

$500.     (See  item  1.) 

9.  Sold  merchandise  to  B.  A.  Butler  for  cash  $3,100. 

10.  Paid  cash  for  clerks'  salaries  $325. 

11.  Paid  cash  for  postage  $20. 

12.  Received  cash  from  B.  A.  Butler  for  the  amount  he  owed  at  the 

beginning  $700.     (See  item  1.) 

13.  Bought  merchandise  for  cash  from  John  Hopper  $1,400. 

(b)  Transfer  the  increases  and  decreases  in  capital  through  Trading 
title  and  Profit  and  Loss  title.  You  find  that  all  the  expense  assets  except 
$150  in  miscellaneous  expenses  have  been  consumed,  that  $100  of  the 
furniture  and  fixtures  has  been  consumed  in  operating  the  business,  and 
that  merchandise  inventory  is  $3,400. 

11.  (a)  Record  in  expanded  equation  form.  Allow  the  following 
number  of  lines  for  each  title:  Cash  6,  Merchandise  Inventory  4,  Mer- 
chandise Purchases  5,  Merchandise  Sales  6,  Furniture  and  Fixtures  6, 
Accounts  Receivable  3,  Notes  Receivable  3,  Delivery  Equipment  6,  Rent 
3,  Salaries  3,  Office  Supplies  6,  Accounts  Payable  4,  Trading  in  Merchan- 
dise 8,  Profit  and  Loss  10,  Leonard  Rush,  Capital  4. 

1.  Leonard  Rush  began  business  with  $5,000  in  cash;  $7,000  in  mer- 

chandise; $1,000  in  furniture  and  fixtures. 

2.  Sold  merchandise  to  George  W.  Mason,  on  account,  $2,000. 

3.  Bought  a  delivery  car,  on  account,  from  Overland  Motor  Company 


4.  Paid  Close  Realty  Company  cash  for  rent  $275. 

5.  George  W.  Mason  returned  $250  of  merchandise  (item  2). 

6.  Bought  merchandise,  on  account,  from  Gloveteel  and  Company  $750. 

7.  Sold  merchandise  for  $3,200  cash. 

8.  Paid  cash  for  clerks'  salaries  $400. 

9.  Bought  office  supplies  for  $375  cash. 

10.  Sold  merchandise  of  $1,200  to  Robert  L.  Devison,  taking  his  30-day 

note  in  payment. 

11.  Returned  merchandise  of  $225  to  Gloveteel  and  Company  as  unsatis- 

factory. 


134  FUNDAMENTALS  OF  ACCOUNTING 

(b)  Transfer  the  increases  and  decreases  in  capital  through  Trading 
title  and  Profit  and  Loss  title  into  Capital.  Merchandise  inventory  at  close 
of  period  is  $  2 ,800.  Assets  consumed  are :  clerks'  salaries  $400 ;  office  supplies 
$125;  rent  $275;$^  of  delivery  equipment;  Sio  of  furniture  and  fixtures. 

12.  (a)  Record  in  expanded  equation  form.  Allow  the  following 
number  of  lines  for  each  title:  Cash  7,  Merchandise  Inventory  6,  Mer- 
chandise Purchases  3.  Merchandise  Sales  6,  Buildings  3,  Furniture  and 
Fixtures  6,  Accounts  Receivable  5,  Insurance  6,  Salaries  3,  Accounts  Pay- 
able 3,  Notes  Payable  3,  Trading  in  Merchandise  8,  Profit  and  Loss  9, 
Mason  Dixon,  Capital  4. 

1.  Mason  Dixon  began  business  January  1,   19—,  with  $5,000  cash; 

$8,800  merchandise;  $25,000  buildings;  $1,200  furniture  and  fixtures. 

2.  Sold  on  account  to  Eugene  Logan  $2,000. 

3.  Paid  for  insurance  on  building  $300  cash. 

4.  Sold  merchandise  for  $1,500  cash. 

5.  Received  check  for  $1,200  on  account,  from  Eugene  Logan  (item 

2). 

6.  Drew  for  personal  use  $200  cash. 

7.  Paid  cash  for  clerks'  salaries  $800. 

8.  Bought  merchandise  on  account  from  Hervey,  Bloom  and  Company 

$2,000. 

9.  Eugene  Logan  returned  merchandise  of  $350  as  unsatisfactory. 

10.  Merchandise  valued  at  $75  was  stolen  from  store. 

11.  Gave  Hervey,  Bloom  and  Company  a  note  for  $1,000  and  paid  re- 

mainder of  account  in  cash  (item  8). 

12.  Sold  merchandise  to  J.  T.  Bergin  on  account  $850. 

13.  Paid  $55  cash  for  a  new  office  desk. 

14.  Eugene  Logan  paid  the  balance  of  his  account,  $450  in  cash  (items  2, 

5,  and  9). 

(b)  Transfer  the  increases  and  decreases  in  capital  through  Trading 
title  and  Profit  and  Loss  title  to  Capital.  The  following  assets  were  con- 
sumed in  conducting  the  business:  all  of  clerks'  salaries  $800  (item  7); 
$25  of  insurance  (item  3);  and  $12  of  furniture  and  fixtures  (item  1). 
Merchandise  inventory  is  $7,900. 

13.  (a)  Record  in  expanded  equation  form.  Four  pages  of  paper 
are  required.  The  figure  after  each  title  represents  the  number  of  lines 
to  allow:  Cash  9,  Merchandise  Inventory  6,  Merchandise  Purchases  9, 
Merchandise  Sales  n,  Furniture  and  Fixtures  9,  Accounts  Receivable  8, 
Notes  Receivable  4,  Donations  3,  Salaries  4,  Stationery  and  Printing  7, 
Freight  and  Drayage  Inward  3,  Rent  4,  Expense  3,  Accounts  Payable 


EXPANSION  BY  SUBSTITUTION  135 

6,  Trading  in  Merchandise  15,  Profit  and  Loss  24,  William  J.  Brumm, 
Capital  5. 

(b)  Prepare  a  statement  of  assets,  liabilities,  and  capital. 

(c)  Prepare  a  statement  of  profits  and  losses.  Assume  a  period  of 
one  month. 

1.  William  J.  Brumm  began  business  June  1,  19 — ,  with  $5,000  cash; 

$12,000  merchandise;  $1,300  furniture  and  fixtures.     He  owed  L.  P. 
Day  $300  on  account. 

2.  Paid  rent  of  $200  cash. 

3.  Sold  merchandise  to  Morgan  T.  Ehlers,  on  account,  for  $3,500. 

4.  Paid  cash  for  clerks'  salaries  $650. 

5.  Gave  $25  cash  to  Salvation  Army. 

6.  Bought  merchandise,  on  account,  from  Lord  and  Taylor  $2,500. 

7.  Sold  merchandise  for  cash  $2,875. 

8.  Paid  $325  cash  for  stationery  and  printing. 

9.  Paid  $18  cash  for  freight  and  drayage  on  merchandise  purchased. 

10.  Morgan  T.  Ehlers  paid  $1,500  of  his  account  in  cash  and  gave  a  note 

for  $2,000  (item  3). 

11.  Sold  merchandise  to  B.  M.  Terrott,  on  account,  $2,800. 

12.  Paid  $125  cash  for  miscellaneous  expense. 

13.  Paid  L.  P.  Day  $300  cash  (item  1). 

14.  Returned  merchandise  of  $500  to  Lord  and  Taylor  because  it  was 

not  the  quality  ordered. 

(d)  Transfer  the  increases  and  decreases  in  capital  through  Trad- 
ing title  and  Profit  and  Loss  title  to  Capital.  You  find  that  all  of  the 
expense  items  except  $125  of  stationery  and  printing  have  been  consumed 
in  conducting  the  business  and  $10  of  furniture  and  fixtures  has  been  con- 
sumed.    Merchandise  inventory  is  $7,300. 

14.  The  following  transactions  represent  a  continuation  of  the  business 
of  William  J.  Brumm  in  Problem  13. 

(a)  Record  in  expanded  equation  form  under  titles  for  Problem  13. 
Add  these  additional  titles:  Miscellaneous  Expense  3,  Shipping  Supplies 
6,  Insurance  6,  Postage  3. 

1.  Paid  rent  of  $200  cash. 

2.  Paid  cash  for  clerks'  salaries  $650. 

3.  Sold  merchandise  to  L.  P.  Day,  on  account,  $1,800. 

4.  Received  check  for  $1,800,  on  account,  from  B.  M.  Terrott. 

5.  Paid  miscellaneous  expenses  $325  cash. 

6.  Bought  merchandise,  on  account,  from  Excelsior  Sales  Company, 

$2,250. 


136  FUNDAMENTALS  OF  ACCOUNTING 

7.  Paid  Lord  and  Taylor  in  full  $2,000  cash. 

8.  Sold  merchandise  to  C.  M.  Hackman  for  cash  $3,875. 

9.  Paid  $48  cash  for  shipping  supplies. 

10.  Paid  $60  cash  to  New  York  Insurance  Company  for  insurance  on  mer- 

chandise. 

11.  Sold  merchandise  to  B.  M.  Terrott,  on  account,  $1,625. 

12.  Paid  $15  cash  for  postage. 

13.  Bought  merchandise  from  Engles  and  White  $1,300  cash. 

(b)  Transfer  the  increases  and  decreases  in  capital  through  Trading 
title  and  Profit  and  Loss  title  to  Capital.  All  of  the  expense  items  have 
been  consumed  except  the  following:  $18  of  shipping  supplies;  $55  of  in- 
surance. $10  of  the  furniture  and  fixtures  was  consumed.  Merchandise 
inventory  is  $5,740. 

15.  (a)  Record  in  expanded  equation  form.  Three  pages  of  paper  are 
required.  Allow  the  following  number  of  lines  for  each  title:  Cash  7, 
Merchandise  Inventory  4,  Merchandise  Purchases  5,  Merchandise  Sales 
6,  Real  Estate  3,  Furniture  and  Fixtures  6,  Accounts  Receivable  4,  Notes 
Receivable  3,  Delivery  Equipment  6,  Stationery  and  Printing  6,  Salaries 
3,  Coal  3,  Light  and  Gas  3,  Expense  3,  Accounts  Payable  7,  Trading  in 
Merchandise  8,  Profit  and  Loss  11,  Rodney  C.  Murray,  Capital  4. 

1.  Rodney  C.  Murray  started  business  with  the  following  assets  and 

liabilities:  cash  $10,000;  merchandise  $20,000;  real  estate  $175,000; 
furniture  and  fixtures  $2,500;  owes  to  Geo.  M.  Cohen,  on  account, 
$8,000;  due  from  L.  F.  Wade  on  notes  receivable  $6,500;  owes  to  F. 
A.  Fitzgerald,  on  account,  $4,760. 

2.  Bought  from  Gimble  and  Dunn,  on  account,  delivery  equipment 

$2,400. 

3.  Sold  merchandise,  on  account,  to  Dusk  and  Spoons  $7,250. 

4.  Bought  from  J.  M.  Shoemaker  and  Sons,  on  account,  stationery  and 

printing  $425. 

5.  Paid  cash  for  salaries  $2,050. 

6.  Paid  cash  for  coal  $175. 

7.  Sold  merchandise  to  D.  M.  Fairbanks,  on  account,  $9,700. 

8.  L.  F.  Wade  paid  his  note  in  cash  $6,500  (item  1). 

9.  Returned  merchandise  to  George  M.  Cohen  as  unsatisfactory  $2,500. 

10.  Paid  balance  of  George  M.  Cohen's  account  in  cash  $5,500  (items  1 

and  9). 

11.  Paid  cash  for  electric  light  and  gas  $48. 

12.  Bought  merchandise  from  F.  A.  Fitzgerald,  on  account,  $8,460. 

13.  Dusk  and  Spoons  returned  merchandise  of  $350  (item  3). 


EXPANSION  BY  SUBSTITUTION  137 

14.  Paid  cash  for  miscellaneous  expenses  $230 

15.  Sold  merchandise  for  cash  $12,750. 

(b)  Transfer  the  increases  and  decreases  in  capital  through  Trading 
title  and  Profit  and  Loss  title  to  Capital.  The  following  expense  assets 
were  consumed  in  conducting  the  business :  $  1 2  5  of  furniture  and  fixtures ; 
$120  of  delivery  equipment;  $300  of  stationery  and  printing;  salaries 
$2,050;  coal  $175;  light  and  gas  $48;  miscellaneous  expense  $230.  Mer- 
chandise inventory  is  $8,509. 

(c)  Prepare  a  statement  of  assets,  liabilities,  and  capital. 

(d)  Prepare  a  profit  and  loss  statement.     Assume  a  period  of  1  year. 

16.  (a)  Record  in  expanded  equation  form.  Two  pages  of  paper  are 
required.  Allow  the  following  number  of  lines  for  each  title:  Cash  5, 
Merchandise  Inventory  4,  Merchandise  Purchases  3,  Merchandise  Sales  5, 
Accounts  Receivable  3,  Rent  3,  Salaries  3,  Freight  and  Drayage  Inward  3, 
Coal  3,  Accounts  Payable  4,  Trading  in  Merchandise  8,  Profit  and  Loss  7, 
L.  V.  Goodman,  Capital  4. 

1.  L.  V.  Goodman  started  business  June  1,  19 — ,  with  cash  of  $1,000  and 

merchandise  of  $2,500. 

2.  Sold  merchandise  to  Kaiser  and  Speers,  on  account,  $300. 

3.  Paid  cash  to  C.  N.  McCoy  for  rent  $65. 

4.  Sold  merchandise  to  Mason  Hunt  for  cash  $685. 

5.  Bought  merchandise,  on  account,  from  Stewart  Brothers  $515. 

6.  Paid  salaries  in  cash  $225. 

7.  Paid  cash  for  freight  and  drayage  $6  on  merchandise  purchased. 

8.  Bought  coal  from  B.  W.  Vayingher,  on  account,  $60. 

9.  Received  check  for  $300  from  Kaiser  and  Speers  (item  2) . 

(b)  Transfer  increases  and  decreases  in  capital  through  Trading  title 
and  Profit  and  Loss  title  to  Capital.  All  expense  assets  were  consumed  in 
conducting  the  business  except  the  coal,  none  of  which  was  used.  Mer- 
chandise inventory  at  close  of  period  is  $1,900. 

(c)  Prepare  a  statement  of  assets,  liabilities,  and  capital. 

(d)  Prepare  a  statement  of  profits  and  losses.  Assume  a  period  of 
3  months. 

17.  (a)  Record  in  expanded  equation  form.  Three  pages  of  paper  are 
required.  Allow  the  following  number  of  lines  for  each  title:  Cash  8, 
Merchandise  Inventory  6,  Merchandise  Purchases  3,  Merchandise  Sales 
6,  Furniture  and  Fixtures  5,  Accounts  Receivable  4,  Taxes  6,  Salaries  3, 
Office  Supplies  6,  Miscellaneous  Expense  3,  Accounts  Payable  4,  Notes 
Payable  3,  Trading  in  Merchandise  8,  Profit  and  Loss  9,  Barney  Gray, 
Capital  4,  Real  Estate  3. 


1 38  FUNDAMENTALS  OF  ACCOUNTING 

i.  Barney  Gray  started  business  January  i,  ig— ,  with  $2,000  cash; 
$3,500  merchandise;  $800  furniture  and  fixtures;  real  estate  $7,000. 

2.  Sold  merchandise  to  Harley  Ward,  on  account,  for  $750. 

3.  Received  a  present  of  $1,000  from  his  father,  which  he  invested  in  the 

business. 

4.  Paid  cash  for  taxes  $58. 

5.  Paid  cash  for  clerks'  salaries  $275. 

6.  Sold  merchandise  to  Jordan,  Marsh  Company  for  cash  $1,200. 

7.  Received  check  from  Harley  Ward  for  $750. 

8.  A  fire  destroyed  merchandise  of  $800  and  furniture  of  $200.     No 

insurance  was  carried, 
g.  Bought  merchandise,  on  account,  from  Benjamin  T.  Turner  $1,500. 

10.  Bought  a  new  desk  from  Carpenter  and  Son,  on  account,  $48. 

11.  Paid  cash  for  office  supplies  $36. 

12.  Paid  cash  for  miscellaneous  expense  $120. 

13.  Drew  $200  cash  for  personal  use. 

14.  Paid  his  account  with  Benjamin  T.  Turner  (item  g  )  by  giving  his 

60-day  note  for  $1,500. 

15.  Sold  merchandise  to  Carl  T.  Dobbin,  on  account,  for  $750. 

16.  Bought  a  typewriter  for  $go  cash. 

(b)  Transfer  increases  and  decreases  in  capital  through  Trading  title 
and  Profit  and  Loss  title  to  Capital.  The  following  expense  items  were 
consumed  in  conducting  the  business:  $38  of  taxes  (item  4) ;  all  of  clerks' 
salaries  $275  (item  5);  one-half  of  the  office  supplies  $18  (item  11);  all  of 
the  miscellaneous  expense  $1 20  (item  12) ;  merchandise  inventory  is  $2,600. 

(c)  Prepare  a  statement  of  assets,  liabilities,  and  capital. 

(d)  Prepare  a  statement  of  profits  and  losses.  Assume  a  period  of  1 
month. 

18.  (a)  Record  in  expanded  equation  form.  Three  pages  of  paper  are 
required.  Allow  the  following  number  of  lines  for  each  title:  Cash  8, 
Merchandise  Inventory  4,  Merchandise  Purchases  5,  Merchandise  Sales 
6,  Building  3,  Furniture  and  Fixtures  3,  Accounts  Receivable  6,  Notes 
Receivable  3,  Salaries  3,  Expense  3,  Bad  Debts  3,  Delivery  Expense  3, 
Light  and  Heat  3,  Salesmen's  Traveling  Expenses  3,  Office  Supplies  6, 
Accounts  Payable  6,  Trading  in  Merchandise  8,  Profit  and  Loss  n, 
Daniel  Duncan,  Capital  4. 

1.  Daniel  Duncan  started  business  March  1,  ig — ,  with  the  following 
assets  and  liabilities:  cash  $4,200;  merchandise  $6,500;  building 
$35,000;  furniture  and  fixtures  $1,200;  he  owed  George  F.  Conners, 
on  account,  $700;  Perry  Brown,  on  account,  $400;  due  from  J.  B. 


EXPANSION  BY  SUBSTITUTION  139 

Jackson,  on  account,  $565 ;  due  from  F.  X.  Bushman  on  notes  receiv- 
able $1,200;  due  from  Bill  Davis,  on  account,  $65. 

2.  Sold  merchandise  to  J.  B.  Jackson,  on  account,  $2,600. 

3.  Paid  Perry  Brown  $400  cash  (item  1). 

4.  Returned  merchandise  of  $300  to  George  F.  Conners  (item  1). 

5.  Paid  cash  for  salaries  $375. 

6.  Paid  cash  for  miscellaneous  expense  $135. 

7.  Received  check  from  Bill  Davis  for  $50  (item  1).     It  is  found  im- 

possible to  collect  the  remainder  of  his  account  $15.     (Bad  debts.) 

8.  Paid  cash  for  delivery  expense  $9. 

9.  Paid  cash  for  light  and  heat  $30. 

10.  J.  B.  Jackson  returned  merchandise  of  $600  on  account  of  a  mistake 

in  the  order. 

11.  Sold  merchandise  for  cash  $1,400. 

12.  Paid  cash  for  salesmen's  traveling  expenses  $28. 

13.  Bought  office  supplies  from  Gristede  Brothers,  on  account,  $195. 

14.  Bought  merchandise,  on  account,  from  Perry  Brown  $1,950. 

15.  Sold  merchandise  to  August  Nichols  and  Company,  on  account, 

$2,450. 

(b)  Transfer  increases  and  decreases  in  capital  through  Trading  title 
and  Profit  and  Loss  title  to  Capital.  All  expense  assets  were  consumed 
in  conducting  the  business  except  $95  of  office  supplies.  Merchandise 
inventory  is  $5,265. 

(c)  Prepare  a  statement  of  assets,  liabilities,  and  capital. 

(d)  Prepare  a  profit  and  loss  statement.     Assume  a  period  of  4  months. 

19.  (a)  Record  in  expanded  equation  form.  Two  pages  of  paper  are 
required.  Allow  the  following  number  of  lines  for  each  title:  Cash  7, 
Merchandise  Inventory  4,  Merchandise  Purchases  3,  Merchandise  Sales  7, 
Furniture  and  Fixtures  3,  Accounts  Receivable  4,  Salesmen's  Commissions 
3,  Cartage  3,  Salaries  3,  Telegrams  3,  Ice  and  Distilled  Water  3,  Accounts 
Payable  3,  Trading  in  Merchandise  8,  Profit  and  Loss  10,  Louis  N.  Barry, 
Capital  4. 

1.  Louis  N.  Barry  started  business  January  1,  19 — ,  with  cash  of  $2,000; 

merchandise  of  $2,800;  furniture  and  fixtures  of  $800. 

2.  Sold  merchandise  for  cash  $600. 

3.  Paid  cash  for  commissions  to  salesmen  $25. 

4.  Paid  $5  cash  for  postage. 

5.  Sold  merchandise  to  Procter  and  Gamble  on  account  $675. 

6.  Paid  cash  for  salaries  $325. 

7.  Sold  merchandise  to  L.  D.  Kruson  and  Company,  on  account,  $1,200. 


140  FUNDAMENTALS  OF  ACCOUNTING 

8.  Bought  merchandise  from  the  Page  Hardware  Company,  on  account, 

$2,250. 

9.  Procter  and  Gamble  returned  merchandise  of  $75  as  being  damaged. 

Paid  balance  of  their  account  in  cash  $600  (item  5). 

10.  The  damaged  merchandise  in  item  9  was  destroyed. 

11.  Paid  $4.50  cash  for  telegrams  during  the  month. 

12.  Paid  $9.50  cash  for  ice  and  distilled  water. 

(b)  Transfer  increases  and  decreases  in  capital  through  Trading  title 
and  Profit  and  Loss  title  to  Capital.  All  expense  assets  were  consumed 
in  conducting  the  business.     Merchandise  inventory  $3,565. 

(c)  Prepare  a  statement  of  assets,  liabilities,  and  capital. 

(d)  Prepare  a  statement  of  profit  and  loss.  Assume  a  period  of  6 
weeks. 

20.  (a)  Record  in  expanded  equation  form.  Four  pages  of  paper  are 
required.  Allow  the  following  number  of  lines  for  each  title:  Cash  12, 
Merchandise  Inventory  4,  Merchandise  Purchases  3,  Merchandise  Sales 
7,  Furniture  and  Fixtures  3,  Investments  3,  Accounts  Receivable  7,  Adver- 
tising 3,  Office  Supplies  7,  Salaries  3,  Delivery  Expenses  3,  Postage  7, 
Donations  3,  Shipping  Supplies  3,  Insurance  6,  Coal  6,  Accounts  Payable 
6,  Notes  Payable  3,  Trading  in  Merchandise  8,  Profit  and  Loss  14,  M. 
S.  Hopkins,  Capital  4. 

1.  M.  S.  Hopkins  started  business  November  1,  19 — ,  with  the  following 

assets  and  liabilities:  cash  $1,675.30;  merchandise  $15,683.60;  furni- 
ture and  fixtures  $1,150;  bonds  purchased  for  investment  $4,240; 
customers  owing  him:  George  L.  Geddes  $52.65;  Ned  Todman 
$136.15;  Harold  Squibb  $925.20.  He  owes,  on  account,  Gordon 
Brothers  $1,170.85;  Knight,  Freeze  and  Company  $435.15.  He  owes 
Roback  and  Smith  $825  on  a  note. 

2.  Paid  Harper  Brothers  $30  cash  for  advertising. 

3 .  Sold  merchandise  to  Smithsonian  Book  Concern,  on  account,  $1 , 1 50. 75. 
4-  Bought  office  supplies  from  Carpenter  and  Company  for  $317  cash. 

5.  Paid  cash  for  rent  $125. 

6.  Paid  cash  for  salaries  $718. 

7.  Sold  merchandise  to  Bison  and  Clark,  on  account,  $91 7.25. 

8.  Received  check  for  $52.65  from  George  L.  Geddes  (item  1). 

9.  Ned  Todman  returned  goods  amounting  to  $136.15  as  unsatisfactory 

(item  1). 

10.  Paid  note  of  $825  held  by  Roback  and  Smith  (item  1). 

11.  Paid  cash  for  delivery  expenses  $14. 

12.  Sold  merchandise  to  sundry  customers  for  $2,450  cash. 


EXPANSION  BY  SUBSTITUTION  141 

13.  Purchased  merchandise  of  Gordon  Brothers  $537.18  cash. 

14.  Took  merchandise  of  $145  cost  price  for  personal  use. 

15.  Paid  cash  for  postage  $35. 

16.  Donated  $15  to  United  Charities. 

17.  Bought  wrapping  paper  and  twine  from  Davis  Paper  Works,  6n 

account,  $1,250. 

18.  Paid  cash  for  insurance  $120. 

19.  Bought  coal  from  the  Three  State  Coal  Corporation,  on  account.  $118. 

(b)  Transfer  increases  and  decreases  in  capital  through  Trading  title 
and  Profit  and  Loss  title  to  Capital.  All  expense  assets  were  consumed 
except  the  following:  office  supplies  $110;  postage  $8;  insurance  $110; 
coal  $90.     Merchandise  inventory  at  end  of  period  $14,003. 78. 

(c)  Prepare  statement  of  assets,  liabilities,  and  capital  at  end  of  period. 

(d)  Assume  1  month's  time  and  prepare  a  statement  of  profit  and 
loss. 


CHAPTER   XI 

FURTHER  APPLICATIONS   OF   EXPANSION  BY   SUB- 
STITUTION—THE LEDGER  AND  THE 
TRIAL  BALANCE 

Purpose  of  Chapter.— 
i.  Individual  accounts  receivable  and  payable. 

2.  Development  of  the  account  by  means  of  the  horizontal 

expansion  of  the  equation. 

3.  Construction  and  operation  of  the  ledger. 

4.  Construction  and  use  of  the  trial  balance. 

Expanding  Accounts  Receivable. — The  title,  Accounts  Re- 
ceivable, represents  our  claims  against  others.  To  expand  this 
title  we  substitute  the  names  of  the  individual  customers  and 
show  under  the  names  of  each  the  increases  and  decreases  of  the 
asset. 

To  illustrate  this  substitution  the  following  transactions 
have  been  recorded  first  under  the  general  title,  Accounts  Re- 
ceivable, and  then  under  the  names  of  the  individual  customers, 
Henry  Brown,  John  Smith,  and  George  Jones. 

1.  Sold  Henry  Brown  merchandise  on  account  $1,000. 

2.  Sold  John  Smith  merchandise  on  account  $600. 

3.  Received  $600  in  cash  from  Smith  for  item  2. 

4.  Sold  George  Jones  merchandise  on  account  $500. 

5.  Henry  Brown  returned  $200  in  merchandise  from  item  1. 

6.  Sold  John  Smith  another  bill  of  merchandise  on  account  amounting 
to  $400. 

7.  Henry  Brown  paid  $500  in  cash  on  item  1. 

8.  Received  $300  in  cash  from  George  Jones  in  part  payment  of 
item  4. 

142 


FURTHER  APPLICATIONS  OF  EXPANSION 


143 


First  Method 
Accounts  Receivable 


Increases 

(1)  Henry  Brown.  . .  . 

(2)  John  Smith 

(4)  George  Jones 

(6)  John  Smith 


>i,ooo 

600 

500 

400 
2,500 


Decreases 
(3)  John  Smith 

$    600 

(5)  Henry  Brown 

(7)  Henry  Brown 

(8)  George  Jones 

200 

500 

300 
1,600 

Although  this  title  contains  all  the  information,  as  to  increases 
and  decreases,  it  is  difficult  to  find  the  increases  and  decreases 
for  each  customer.  By  substituting  their  names,  we  obtain  the 
desired  information. 


Second  Method 
Henry  Brown 

Increases  Decreases 

(1) $1,000 


(5) 
(7) 


$200 
500 


John  Smith 
Increases  Decreases 

(2) $    600 

(6) 400 

George  Jones 

Increases  Decreases 

(4) %    500 


(3) 


(8) 


$300 


The  sum  of  the  excess  of  increases  over  decreases  under  each 
man's  name  (Brown,  $300  +  Smith,  $400  +  Jones,  $200)  equals 
$900,  the  same  as  the  difference  between  the  two  sides  of  the 
Accounts  Receivable  title.  The  second  method  will  be  used 
hereafter,  except  where  it  is  desirable  in  illustrations  to  use  the 
abbreviated  form  of  the  first  method. 

Expanding  Accounts  Payable. — Accounts  Payable  is  a  lia- 
bility title  representing  the  claims  of  others  against  us.    To 


M4 


FUNDAMENTALS  OF  ACCOUNTING 


expand  it  we  need  only  to  substitute  the  names  of  the  individual 
creditors.  To  illustrate,  the  following  transactions  appear  first 
under  Accounts  Payable,  and  then  under  the  names  of  the 
individual  creditors. 


i.  Bought  merchandise  $1,200  on  account  from  S.  C.  Hughes. 

2.  Bought  merchandise  $2,000  on  account  from  Burns  and  Company. 

3.  Bought  merchandise  $1,500  on  account  from  R.  T.  Howe. 

4.  Returned  to  Burns  and  Company  $300  in  merchandise  from  item 
2,  because  it  was  not  of  the  right  quality. 

5.  Paid  R.  T.  Howe  cash  in  full  of  account  for  item  3. 

6.  Paid  S.  C.  Hughes  $700  on  account  of  item  1. 

7.  Paid  Burns  and  Company  $1 ,000  in  cash  on  account  of  item  2. 

8.  Bought  from  Burns  and  Company  $800  in  merchandise  on  account. 

First  Method 
Accounts  Payable 


Decreases 

(4)  Burns  and  Company .  $    300 

(5)  R.  T.  Howe 1,500 

(6)  S.  C.  Hughes 700 

(7)  Burns  and  Company.  1,000 


Increases 

(1)  S.  C.  Hughes $1,200 

(2)  Burns  and  Company.  2,000 

(3)  R.  T.  Howe 1 ,500 

(8)  Burns  and  Company.  800 


5.500 


Substituting  names  of  individual  creditors  for  the  general  title: 


Second  Method 
S.  C.  Hughes 
Decreases 
(6) $    700 


Increases 
(0 $1,200 


Burns  and  Company 


Decreases 

(4) $   300 

(7) 1,000 


Increases 


(2) $2,000 

(8) 800 


R.  T.  Howe 


Decreases 


Increases 


(5) 


$1,500 


(3) 


$1,500 


FURTHER  APPLICATIONS  OF  EXPANSION  145 

The  sum  of  the  balances  of  the  individual  titles  is,  of  course, 
the  same  as  the  balance  of  the  general  title,  Accounts  Payable. 
The  advantages,  as  to  information,  of  the  second  method  are 
apparent.     It  will  be  used  hereafter. 

Expanding  the  Capital  Title. — The  original  investment  by 
the  proprietor  is  shown  as  an  increase  in  his  capital.  This  title 
also  contains  all  permanent  increases  and  decreases  in  his  in- 
vested capital.  Frequently  the  proprietor  withdraws  assets, 
such  as  money  or  merchandise,  for  personal  purposes.  These 
withdrawals  decrease  assets  and  also  decrease  capital  and 
might  be  entered  directly  on  the  left  side  of  Proprietor's  Capital. 
However,  as  a  rule,  the  proprietor  does  not  intend  that  such  with- 
drawals shall  decrease  his  original  capital.  He  knows  that  in  all 
probability  his  capital  has  increased  as  a  result  of  operating  the 
business  and  he  now  wishes  to  use  some  of  his  increased  assets  for 
personal  purposes  before  finding  the  exact  amount  of  the  net 
increase  in  his  capital.  To  indicate  that  these  withdrawals  are 
intended  as  decreases  of  the  capital  increase  represented  by 
the  net  earnings  of  the  business  (net  profit),  a  temporary 
capital  title  is  used.  To  distinguish  the  proprietor's  tempor- 
ary capital  title  from  the  permanent  or  invested  capital  title, 
the  word  "Drawing,"  "Personal,"  or  "Private,"  follows  the 
proprietor's  name  in  the  temporary  title  thus :  "  Charles  Donovan, 
Drawing." 

During  the  accounting  period  all  temporary  increases  in 
capital,  including  the  net  profit,  will  be  entered  on  the  right  and 
the  temporary  decreases  on  the  left  of  this  title.  At  the  end  of 
the  accounting  period  the  net  increase  or  decrease  in  Drawing 
will  be  transferred  to  Capital  as  additional  investment  in  the 
business.  If  it  is  the  proprietor's  intention  to  withdraw  money 
or  other  assets  to  the  amount  of  the  credit  balance  of  his  Drawing 
title  early  in  the  new  accounting  period,  Drawing  may  be  left 
open,  i.e.,  the  step  transferring  the  excess  in  Drawing  to  the 
Capital  title  may  be  omitted. 


146 


FUNDAMENTALS  OF  ACCOUNTING 


To  illustrate  the  expansion  of  the  Capital  title,  the  transac- 
tions given  below  are  first  stated  under  the  general  title,  Capital, 
and  then  separated  under  both  titles,  Drawing  and  Capital. 

1.  Charles  Donovan  began  business  with  $6,000  in  cash. 

2.  He  withdrew  cash  for  personal  use  $100. 

3.  He  withdrew  $70  in  merchandise  for  personal  use. 

4.  He  inherited  $1,500,  which  he  used  for  business  purposes. 

5.  His  net  profit  for  the  year  is  $2,740. 

First  Method 
Charles  Donovan,  Capital 


(2)  Cash $100 

(3)  Merchandise 70 


(1)  Investment $6,000 

(4)  Additional  Investment      1,500 

(5)  Net  Profit 2,740 


Second  Method 
The  two  titles  appear  as  follows : 

Charles  Donovan,  Drawing 


$    100 


70 


(2)  Cash 

(3)  Merchandise 

(6)  Balance,  Transferred 

to  Capital 2,570 


$2, 74c 


(5)  Net  Profit $2,740 


$2,740 


Charles  Donovan,  Capital 


(1)  Investment $6,000 

(4)  Additional  Investment     1,500 
(6)  Balance  from  Draw- 
ing        2,570 


Expanding  the  Equation  Horizontally. — In  connection  with 
every  transaction  there  is  certain  information  which  is  valuable 


FURTHER  APPLICATIONS  OF  EXPANSION 


H7 


and  necessary  in  order  to  fully  explain  the  increase  or  decrease 
in  each  asset,  liability,  or  capital  item.  Since  the  nature  of  the 
information  is  the  same  for  each  transaction,  it  may  be  recorded 
in  special  columns  limited  to  this  use.  The  information  desired 
about  every  transaction  is  the  date,  with  whom  the  transaction 
occurred,  its  nature,  the  terms,  and  the  amount.  So  far,  the 
amount  only  has  been  used.  The  recording  of  additional  in- 
formation is  easily  accomplished  by  expanding  the  equation 
horizontally.  It  has  been  found  convenient  to  write  the  in- 
formation in  the  space  to  the  left  of  that  used  for  recording 
the  amount. 

To  illustrate,  suppose  John  Anderson  began  business  with  a 
cash  investment  of  $2,000  on  June  2,  19 — .  This  might  appear 
in  full  as  follows : 


(a) 


Cash 


June  2,  19 — ,  J.  Anderson, 
investment. $2,000 


John  Anderson,  Capital 

June  2, 19 — ,  Cash  in  vest- 
ment   


>2,000 


This  is  more  conveniently  stated  in  separate  vertical  columns 
reserved  for  the  purpose. 


(b) 


19— 
June 


Cash 


J.  Anderson,  investment 


John  Anderson,  Capital 

19— 

June    2  Cash  investment 


2000 


148 


FUNDAMENTALS  OF  ACCOUNTING 


We  still  retain  the  equation  but  have  added  columns  to  the 
left  of  the  amount  on  each  side  of  the  vertical  equality  sign.  The 
use  made  of  each  column  and  the  order  in  which  they  appear  is 
indicated  below. 

Date         Explanation        Amount         Date         Explanation        Amount 

The  standard  form  of  ledger  account  is  shown  in  Form  2 
which  follows: 


Title 


Date 
Year 

Month 


Explanation 


Amount 
$ 

T  T  H  T  U 


Date 
Year 
Month 


Explanation 


Amount 
$ 


Form  2.     Standard  Form  of  Ledger  Account 

The  heavy  triple  vertical  ruling  in  the  center  indicates  the 
equality  sign  and  divides  the  account  into  two  exactly  similar 
parts. 

The  explanation  column  usually  contains  the  name  or  names 
of  the  other  accounts  affected  and  such  other  information  as  is 
deemed  desirable.  The  folio  column  records  the  page  num- 
ber of  some  other  book  if  an  explanation  is  made  elsewhere.  We 
shall  not  use  the  folio  column  in  this  chapter.  The  amount 
column  containing  the  dollar  sign  ($)  has  unit  ruling.  Reading 
to  the  left  from  the  cents  (i)  column  the  rulings  are  units,  tens, 
hundreds,  thousands,  etc.    This  forces  one  to  write  units  under 


THE  LEDGER  1 49 

units,  tens  under  tens,  etc.,  reducing  the  tendency  to  error  in 
adding  columns. 

The  Account. — The  information  contained  under  each  title 
in  the  equation  is  usually  referred  to  as  an  "account"  and  the 
name  of  the  title  as  an  "account  title,"  "account  heading,"  or 
"caption."  The  account  may  be  defined  as  a  record  of  the  in- 
creases and  the  decreases  with  respect  to  a  particular  asset, 
liability,  or  capital  item.  It  is  always  a  part  of  the  whole 
equation. 

The  Ledger. — Other  names  for  the  expanded  equation  ar- 
ranged in  this  form  are  the  "ledger,"  "book  of  final  entry,"  the 
"master  book,"  etc.  It  contains  the  increases  and  decreases  in 
assets,  liabilities,  and  capital  and  additional  information  of  an 
historical  nature.  When  the  accounts  contain  only  the  amount, 
they  are  called  "  skeleton  "  or  "  T  "  accounts,  and  the  entire  equa- 
tion is  called  a  "skeleton  ledger." 

Debit  and  Credit. — The  words  "debit"  and  "credit"  indicate 
the  left  and  right  sides  respectively  of  the  equation  or  ledger.  In 
recording  the  transaction,  bought  merchandise  for  cash  $100, 
instead  of  saying,  "enter  $100  on  the  left  of  the  ledger  under 
Merchandise  Purchases,"  we  say,  "debit  Merchandise  Purchases 
$100";  and  instead  of  "enter  on  the  right  of  the  ledger  under 
Cash  $100,"  we  say,  "credit  Cash  $100."  The  words  "debtor" 
and  "  creditor  "  refer  to  people.  Debtor  means  one  who  owes  and 
creditor  one  who  is  owed.  If  John  Smith  owes  us  he  is  our  debtor, 
and  if  we  owe  Henry  White  he  is  our  creditor.  The  abbrevia- 
tions for  "debtor"  and  "creditor"  are,  Dr.  and  Cr.  They  are 
also  used  for  "debit"  and  "credit." 

Recording  Transactions  in  the  Ledger.  —  To  show  the 
operation  of  the  ledger  we  shall  record  the  following  transac- 
tions : 


150 


FUNDAMENTALS  OP  ACCOUNTING 


(LudJ^L 


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7?f^£/£$5c,^* 

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THE  LEDGER  151 

March,  19 — 

1 .     Robert  Duncan  began  business  with  cash  $4,000  and  merchandise 

$3,000. 
4.     Sold  merchandise  to  C.  F.  Andrews  on  account  $1,500. 
7.     Bought  from  L.  E.  Howe,  on  account,  merchandise  $1,000. 
9.     Sold  Ellsworth  and  Company  merchandise  on  account  $  1 ,  200. 
10.     Received  check  from  C.  F.  Andrews  for  sale  of  March  4,  $1,500. 

13.  Sold  Ellsworth  and  Company  merchandise  on  account  $2,000. 

14.  Paid  L.  E.  Howe  on  account  of  invoice  of  March  7,  $700 

15.  Bought  merchandise  from  L.  E.  Howe  on  account  $900. 

15.  Received  check  from  Ellsworth  and  Company  for  sale  March  9, 

$1,200. 

16.  Bought  merchandise  for  cash  $2,500. 

Trace  these  items  to  the  debit  and  credit  of  the  accounts  in  the 
ledger.     The  date  and  explanation  will  identify  each  transaction. 

The  Trial  Balance. — In  previous  chapters  we  learned  that 
when  transactions  are  entered  in  the  equation  correctly,  the 
amounts  on  each  side  must  be  the  same,  else  there  could  not  be 
an  equation,  i.e.,  an  equality  between  the  two  sides.  When 
many  amounts  are  entered  in  the  ledger  in  the  various  accounts 
it  is  easy  to  make  errors,  particularly  by  entering  an  amount  on 
the  wrong  side  of  the  ledger.  We  must  therefore  test  the  ledger 
periodically  to  detect  errors  of  this  kind.  To  determine  the 
equality  of  the  two  sides  we  summarize  or  condense  the  ledger 
by  writing  the  equation  (ledger)  in  a  form  more  convenient  for 
adding  the  total  debit  and  credit  amounts.  This  form  is  known 
as  the  "trial  balance." 

The  most  convenient  way  to  prepare  a  trial  balance  is  to  add 
and  enter  in  small  pencil  figures  the  total  debits  and  the  total 
credits  of  each  account,  and  then  prepare  a  list,  or  schedule,  by 
entering  on  a  sheet  of  paper  the  page  of  the  ledger,  the  name  of 
the  account,  and  to  the  right,  in  two  columns,  the  total  debits  and 
total  credits  of  each  account,  using  a  separate  line  for  each  ac- 
count. Next,  find  the  totals  of  the  Debit  and  Credit  columns, 
which  should  be  equal — balance.     (See  Form  3a.) 


152  FUNDAMENTALS  OF  ACCOUNTING 

If  the  trial  balance  does  not  balance,  some  error  has  been 
made.  The  mere  fact  that  the  trial  balance  balances,  however, 
does  not  prove  that  the  recording  has  been  done  correctly,  al- 
though it  is  usually  considered  a  good  test  of  correctness.  If 
the  $1,000  entered  as  a  debit  in  Merchandise  Purchases  account 
had  been  debited  to  Cash  instead,  the  trial  balance  would  still 
balance,  since  no  change  has  been  made  in  the  total  of  the  debits, 
but  both  Cash  and  Merchandise  Purchases  accounts  would  be 
incorrect. 

Perhaps  the  student  can  name  some  other  errors  that  will  not 
affect  the  equality  of  the  trial  balance. 

The  Two  Forms  of  the  Trial  Balance. — There  are  two  forms 
of  the  trial  balance — that  just  described,  called  a  "trial  balance 
of  totals,"  and  one  more  generally  used,  called  a  "trial  balance  of 
differences."  This  latter  is  found  by  taking  the  difference  be- 
tween the  two  sides  of  each  account,  and  entering  an  excess  of 
debits  over  credits  in  the  Debit  column  and  an  excess  of  credits 
over  debits  in  the  Credit  column.  Each  account  will  show  either 
a  debit  or  a  credit  balance.  Note  carefully  in  the  ledger  shown 
the  manner  of  writing  the  small  pencil  footings  in  each  account 
and  the  way  in  which  the  debit  or  credit  excess  in  each  account  is 
shown.     Neatness  of  work  counts  for  much  here. 

In  the  above  example,  if  $3,200  is  deducted  from  each  side 
of  the  Cash  account  the  result  will  be  an  excess  debit  of  $3,500. 
A  similar  operation  in  the  account  of  C.  F.  Andrews  leaves  no 
balance — therefore  it  is  omitted  from  the  trial  balance— in  the 
Ellsworth  and  Company  account  an  excess  debit  of  $2,000,  and 
in  the    L.  E.  Howe  account  an  excess  credit  of  $1 ,200. 

Atrial  balance  of  differences  must  balance,  because  in  each  ac- 
count equal  amounts  have  been  subtracted  from  both  sides.  Thus 
the  principle  of  this  trial  balance  rests  on  the  mathematical  axiom 
that  equals  deducted  from  equals  leaves  equals. 

The  two  forms  of  trial  balance  for  the  above  example 
follow : 


THE  LEDGER 


153 


?T£>T^st^y?ZSs>r^r-*7sr7y  ^-^^^z^^  /~3^r^=-^r^, 

'<^.  /*?— 

V 

* 
1.7! 

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> 

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Form  3.   (a)   Trial  Balance  of  Totals 


A3 

% 

•sts^sy/^tr^r^^^A^Z^^?^' /&&?JC^**r^ 

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> 

s#^w>&L,s+*^^*;+<&^£sS 

HZ 

c  c  — 

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00  —  1 

Form  3.  (b)  Trial  Balance  of  Differences 

Uses  of  the  Trial  Balance. — The  uses  of  the  trial  balance  are 
as  follows : 


1.  It  proves  that  the  ledger  is  in  equilibrium  on  a  certain 
date. 


*  Note  that  the  ledger  page  appears  in  the  column  at  the  left. 


154  FUNDAMENTALS  OF  ACCOUNTING 

2.  It  provides  information  in  regard  to  assets,  liabilities, 

and  capital  in  a  more  convenient  form  than  the  ledger 
for— 

(a)  The  preparation  of  financial  statements. 

(b)  The  closing  of  the  ledger. 

3.  It  is  useful  in  indicating  errors. 

4.  It  provides  a  condensed  list  of  the  debit  and  credit 

balances  of  the  accounts  in  the  ledger  as  of  a  certain 
date.  These  lists  for  successive  dates  should  be  pre- 
served as  a  permanent  record  for  comparative 
purposes. 

Continuing  the  Ledger. — To  make  clear  the  method  of  taking 
successive  trial  balances  before  closing  the  ledger,  we  shall  record 
additional  transactions  of  Robert  Duncan.  Trace  these  to  the 
accounts  in  the  ledger  by  means  of  the  dates. 


March,  19 — 

17.  Paid  cash  for  two  months'  rent  to  April  30,  $400. 

18.  Bought  from  the  Standard  Fixture  Company,  on  account,  furni- 

ture and  fixtures  for  use  in  the  store,  $1,000.     Sold  to  Foster 

and  Flynn,  merchandise  on  account  $3,000. 
20.     Paid  clerks'  salaries  in  cash  $210. 
ai.     Received  from  Ellsworth  and  Company  to  apply  on  account,  cash 

$500  and  their  30-day  note  for  $1,000. 

23.  Bought  invoice  of  merchandise  from   Dean  and  Johnson   on 

account  $1,500. 

24.  Paid  cash  for  office  supplies  $70. 

25.  Bought  invoice  of  merchandise  from  F.  S.  Morse  on  our  30-day 

note  $1,600. 

26.  Proprietor  withdrew  $50  in  cash  for  personal  use. 

28.  Paid  the  Standard  Fixture  Company  by  check  $1,000. 

29.  Sold  merchandise  to  C.  F.  Andrews  on  account  $1,400. 

30.  Returned  to  Dean  and  Johnson  $400  in  merchandise  from  invoice 

of  the  23rd  because  the  goods  were  of  inferior  quality. 

31.  Foster  and  Flynn  gave  us  their  30-day  note  for  $2,000  to  apply  on 

account. 


THE  LEDGER 


155 


(2-^J^ 

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156 


F  U  X  DA  N I E  NTALS  OF  ACCOU  XT  I XG 


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THE  LEDGER 


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FUNDAMENTALS  OF  ACCOUNTING 


Questions 

i.  What  is  the  purpose  of  substituting  individual  customers'  names 
for  the  title,  Accounts  Receivable,  in  the  equation? 

2.  What  is  the  purpose  of  substituting  individual  creditors'  names 
for  the  title,  Accounts  Payable? 

3.  What  is  the  purpose  of  expanding  the  proprietor's  capital  title? 

4.  What  are  some  of  the  titles  for  the  additional  title  required  to 
expand  the  proprietor's  capital  title? 

5.  After  transferring  the  net  profit  to  the  Drawing  title,  under  what 
conditions  will  the  balance  in  this  title 

(a)  Be  transferred  to  the  Capital  title? 

(b)  Not  be  transferred  to  the  Capital  title? 

6.  What  is  the  result  of  horizontal  expansion  of  the  equation? 

7.  What  is  an  account? 

8.  Describe  the  standard  form  of  account. 

9.  Why  is  unit  ruling  desirable  in  the  dollar  column? 

10.  What  is  the  ledger? 

11.  (a)  What  is  a  T  account?     (b)  Skeleton  ledger? 

12.  Explain  debit,  credit,  debtor,  creditor. 

13.  (a)  What  are  the  abbreviations  for  "debtor  "and  "creditor?" 
(b)  To  what  other  words  do  they  apply? 

14.  What  is  a  trial  balance? 

15.  (a)  What  is  a  trial  balance  of  totals? 
(b)  How  is  it  obtained? 

16.  (a)  What  is  a  trial  balance  of  differences? 
(b)  How  is  it  obtained? 

17.  Explain  the  uses  of  the  trial  balance. 

Problems 

1.  (a)  Expand  the  following  Accounts  Receivable  title  by  sub- 
stituting the  individual  titles. 

Accounts  Receivable 


Increases 

H.F.Ward 

M.D.Williams 

H.F.Ward 

Dennis  and  Company . 

A.  B.  Nichols 

Dennis  and  Company . 
H.F.Ward 


>  500 
700 
600 

1,000 
250 
900 

1,500 


Decreases 
Dennis  and  Company . . 

H.  F.Ward 

H.  F.  Ward 

A.  B.  Nichols 

H.F.Ward 


$1,000 
500 
300 

5° 
800 


THE  LEDGER 


159 


(b)  Balance  the  title  of  H.  F.  Ward,  showing  in  one  item  the  amount 
he  owes  us  on  account. 

2.     (a)  Expand  the  following  by  substitution. 
-^  Accounts  Payable 


Decreases 

Wilson  and  Wood $    200 

John  Davies 400 

Charles  Hughes 1,200 

John  Davies 1 ,000 


Increases 

Charles  Hughes $1,200 

John  Davies 700 

Wilson  and  Wood 500 

John  Davies 1,000 

National   Manufacturing 

Company 800 

John  Davies 600 


(b)  Balance  the  individual  title,  John  Davies,  showing  in  one  item 
the  amount  we  owe  him  on  account. 

3.  Expand  the  following  Capital  title  into  two  titles — a  Drawing  and 
a  Capital  account. 

Walter  Page,  Capital 


(2)  Withdrew  Cash  for  per- 

sonal use $200 

(3)  Withdrew  Merchandise 

for  personal  use 75 

(5)  Withdrew  Cash  for  per- 
sonal use 100 


(1)  Investment $8,000 

(4)  Additional       Invest- 
ment    1 ,000 

(6)  Net  Profit 1,985 


4.  Prepare  a  Drawing  and  a  Capital  title  from  the  following:  Im- 
agine the  entries  in  the  other  titles  affected,  such  as  Cash,  Mer- 
chandise, etc. 

1.  Arthur  Dean  began  business  with  $6,000  in  cash  and  $4,000  in  mer- 

chandise. 

2.  He  withdrew  cash  for  personal  use  $125. 

3.  He  sold  merchandise  for  cash  $1,000. 

4.  He  withdrew  merchandise  for  personal  use  $60. 

5.  He  made  an  additional  investment  of  $2,000  in  cash. 

6.  He  bought  a  delivery  car  for  $1,200  in  cash. 

7.  His  net  profit  for  3  months  was  $2,275. 


160  FUNDAMENTALS  OF  ACCOUNTING 

5.  (a)  Rule  one  sheet  of  letter-size  paper  in  the  horizontally  expanded 
form  of  the  equation  (standard  ledger  ruling)  and  record  the  following 
transactions.  Open  accounts  arranged  in  the  proper  order,  and  allow  lines 
as  follows:  Cash  7,  Merchandise  Inventory  3,  Merchandise  Sales  5,  F.  E. 
Hayes  3,  Expense  4,  Fred  L.  Miner,  Drawing  3,  Fred  L.  Miner,  Capital  4. 

February,  19 — 

1.     Fred  L.  Miner  began  business  with  $2,000  cash  and  $3,000  in 

merchandise. 
4.     Sold  merchandise,  on  account,  to  F.  E.  Hayes  $1,400. 
7.     Sold  merchandise  for  cash  $500. 
9.     Paid  clerks'  salaries  in  cash  $200. 

(b)  Foot  each  account  entering  total  debits  and  credits  in  small  pencil 
figures. 

(c)  Prepare  a  trial  balance  of  totals. 

6.  (a)  The  following  transactions  represent  a  continuation  of  the  busi- 
ness of  Fred  L.  Miner.  Record  in  the  ledger  used  for  Problem  5  and  open 
an  account  for  Merchandise  Purchases,  allowing  three  lines. 

February,  19 — 

10.     Bought  merchandise  for  cash  $1,800. 

12.     Received  check  for  $500,  on  account,  from  F.  E.  Hayes. 

14.  Sold  merchandise  to  M.  E.  Keats  for  cash  $500. 

15.  Paid  $20  cash  for  postage  stamps. 

16.  Withdrew  $60  in  cash  for  personal  use. 

(b)  Foot  in  pencil  each  account  again  and  prepare  a  trial  balance  of 
totals. 

(c)  Enter  in  pencil  the  footings  of  debits  and  credits  in  the  Explanation 
column  on  the  larger  side  of  each  account  and  find  the  difference. 

(d)  Prepare  a  trial  balance  of  differences. 


CHAPTER  XII 

THE   FINANCIAL   STATEMENTS— CLOSING  THE 
LEDGER 

Purpose  of  Chapter. — 

i.     The  balance  sheet  and  profit  and  loss  statement. 

2.  Closing  the  ledger. 

3.  The  post-closing  trial  balance. 

The  Financial  Statements. — The  information  gathered  in 
the  ledger  and  condensed- into  the  trial  balance  does  not  show 
the  financial  condition  or  the  sources  of  changes  in  financial  condi- 
tion in  a  form  readily  understood.  Therefore  two  financial 
statements  must  be  prepared:  (1)  the  balance  sheet,  Form  4  (a) 
and  (b),  and  (2)  the  profit  and  loss  statement,  Form  5. 

1.  The  Balance  Sheet.— This  is  but  another  name  for  the 
statement  of  assets,  liabilities,  and  capital,  or  the  financial 
statement.  The  title  "balance  sheet"  was  doubtless  derived 
from  the  fact  that  when  the  information  it  contains  is  presented 
in  the  form  of  a  horizontal  equation,  Assets  =  Liabilities  + 
Capital,  the  two  sides  are  equal,  i.e.,  they  balance.  There  are 
two  forms  of  balance  sheet:  (1)  the  report  form,  and  (2)  the 
account,  or  technical,  form. 

In  the  report  form,  Form  4  (a),  the  information  is  shown  in 
accordance  with  the  equation 

Assets  —  Liabilities  =  Capital 

In  the  account  form,  Form  4  (b),  the  information  is  set  up 
according  to  the  equation 

ir  161 


162  FUNDAMENTALS  OF  ACCOUNTING 

Assets  =  Liabilities  +  Capital 

The  first  form  with  which  the  student  is  already  familiar  will 
be  continued  under  its  new  title,  balance  sheet.  Illustration 
of  the  second  is  given  on  page  166. 

2.  The  Profit  and  Loss  Statement. — This  title  has  been 
explained  previously.  We  shall  repeat,  however,  that  the  pur- 
pose of  this  statement  (see  Form  5)  is  to  show  the  sources  of  the 
changes  in  capital  that  have  occurred  as  a  result  of  operating  the 
business  during  the  current  period.  In  other  words,  it  shows  the 
causes  of  increases  and  decreases  in  assets  and  liabilities  that 
have  resulted  in  changes  in  capital.  It  is  thus  a  cause  or  source 
statement  summarizing  the  changes  in  capital. 

Two  Plans  of  Procedure. — Two  plans  may  be  followed  in 
preparing  the  statements.  Under  the  first  plan  all  adjustments 
of  assets,  liabilities,  and  capital  are  first  made  in  the  accounts 
in  the  ledger — called  "adjusting"  and  "closing"  the  ledger — 
after  which  the  balance  sheet  and  profit  and  loss  statement  are 
prepared.  Under  the  second  plan  the  statements  are  prepared 
first  and  the  ledger  is  then  adjusted  and  closed.  Under  this  plan 
the  trial  balance  is  used  as  the  starting  point  because  it  is  a 
summary  of  the  ledger.  The  information  contained  in  the  trial 
balance  together  with  the  list  of  inventories  will  enable  one  to 
prepare  the  balance  sheet,  showing  the  assets,  liabilities,  and 
capital  as  of  a  given  date,  and  the  profit  and  loss  statement,  show- 
ing the  sources  of  all  changes  in  capital. 

Advantage  of  Preparing  Statements  First.— If  in  closing  the 
ledger  before  preparing  the  statements  an  error  should  occur 
through  omitting  an  item,  entering  figures  incorrectly,  or  through 
any  other  cause,  the  error  although  corrected  will  remain  on  the 
books  for  all  time  as  evidence  of  careless  work.  This  may  be 
avoided  by  preparing  the  balance  sheet  and  statement  of  profit 


THE  FINANCIAL  STATEMENTS  1 63 

and  loss  first;  then,  if  an  error  occurs,  adjustments  can  be  made 
and  correct  statements  prepared,  since  they  are  not  an  integral 
part  of  the  ledger.  The  profit  and  loss  statement  can  thus  be 
made  to  serve  as  a  guide  in  closing  the  ledger  and  so  enable  one  to 
detect  errors  in  time  to  avoid  making  them  in  the  ledger.  This  is 
especially  important  while  one  is  learning  the  subject,  because  it 
will  save  time  and  produce  a  feeling  of  confidence  in  proving  the 
work  before  making  the  final  record. 

Preparing  the  Statements. — A  convenient  method  in  working 
with  a  trial  balance  and  inventories  is  to  rule  two  columns  on  the 
trial  balance,  just  to  the  left  of  the  Folio  column,  writing  "B/S  " 
for  balance  sheet  and  "P/L"  for  profit  and  loss  statement  at  the 
top  as  indicated  on  the  trial  balance  and  inventories  on  page  164. 
In  the  B/S  column  opposite  each  account  that  will  appear  in  the 
balance  sheet,  write  A  for  Assets,  L  for  Liabilities,  and  C  for 
Capital.  In  the  P/L  column  write  the  initial  letter  of  the  section 
in  which  the  item  will  be  used  in  the  profit  and  loss  statement, 
viz.,  S  for  Sales,  CG  for  Cost  of  Goods  Sold,  and  E  for  Expense. 
Items  having  letters  in  both  columns  will  be  used  in  both  state- 
ments, and  items  marked  "X"  on  the  line  indicate  that  adjust- 
ments in  the  amount  must  be  made  before  entering  in  the  section 
of  the  statement  indicated. 

The  individual  customers'  accounts  will,  of  course,  be  col- 
lected in  a  schedule  of  accounts  receivable  and  only  the  totals 
entered  in  the  balance  sheet  as  Accounts  Receivable;  and  the 
same  procedure  will  be  followed  for  individual  creditors,  listing 
the  total  as  Accounts  Payable. 

Every  item  in  the  balance  sheet  should  be  supported  by  a 
schedule  explaining  it  in  detail.  This  was  done  in  the  report  on 
the  condition  of  the  business  of  Henry  Martin  in  Chapter  V, 
page  51.  The  only  schedules  necessary  in  this  and  succeeding 
problems  are  the  two  for  customers  and  creditors — unless  ad- 
ditional schedules  are  specifically  called  for. 

With  all  items  marked  to  indicate  the  statement  and  the 


1 64 


FUNDAMENTALS  OF  ACCOUNTING 


section  of  the  statement  in  which  they  are  to  appear,  little 
difficulty  should  be  experienced  in  preparing  correct  statements. 
The  trial  balance,  additional  information,  and  statements  follow: 


Robert  Duncan,  Trial  Balance,  March  31,  19- 


P/L  B/S 


A 

1 

A 

1 

A 

1 

A 

1 

A 

1 

C  G 

2 

) 

<  A 

2 

L 

2 

•L. 

2 

L 

2 

G 

2 

.C 

3 

C  G 

3 

S 

3 

E> 

f 

3 

E> 

C 

3 

Cash 

Notes  Receivable 

C.  F.  Andrews 

Ellsworth  and  Company 

Foster  and  Flynn 

Merchandise  Inventory  3/1/ — . 

Furniture  and  Fixtures 

Notes  Payable 

L.  E.  Howe 

Dean  and  Johnson 

Robert  Duncan,  Capital 

Robert  Duncan,  Drawing 

Merchandise  Purchases 

Merchandise  Sales 

Rent 

Expense 


$  2,270 

3,000 

- 

1,400 

- 

500 

— 

1,000 

- 

3,000 

- 

1,000 

$  1,600 
1,200 
1,100 

7,000 

50 

- 

7,100 

9,100 

400 

- 

280 

- 

$20,000 

- 

$20,000 

P/L 

C/G 

E 


B/S 
A 


Additional  Information 

Inventories,  March  31,  19 — 

Merchandise  in  stock 

Furniture  and  Fixtures  decreased  in  value  through 
use  2% 

Rent  paid  in  advance  1  month 

Expense:  Miscellaneous  supplies  unused. 


i,200 


20O 

5c 


Additional  Information  Needed.— The  trial  balance  gives  only 
the  information  on  the  ledger.  It  has  been  pointed  out  that  some 
information— e.g.,  the  cost  of  goods  sold— is  not  usually  recorded 


THE  FINANCIAL  STATEMENTS 


165 


at  the  time  each  transaction  takes  place,  because  of  the  expense 
involved  in  securing  the  information  at  that  time.  This  infor- 
mation is  secured,  however,  at  the  close  of  the  fiscal  period.  The 
inventory  of  goods  unsold  is  taken,  the  unused  portion  of  all 
expense  purchases  is  determined,  and  the  amount  of  the  decrease 
in  value  of  the  various  assets  is  calculated.  For  Robert  Duncan's 
business,  this  information  is  as  follows: 


Robert  Duncan 
Balance  Sheet 
March  31,  19 — 


Assets: 

Cash 

Notes  Receivable 

Accounts  Receivable  (Schedule  1) .  .  . 

Merchandise  Inventory 

Rent  Prepaid •. 

Expense  Inventory 

Furniture  and  Fixtures 

Total 

Liabilities: 

Notes  Payable 

Accounts  Payable  (Schedule  2) . .  .  . 

Total 

Capital: 

Robert  Duncan,  Investment 

.    Net  Profit 5 $i,75o 

Less:  Withdrawals 50 

Net  Increase  in  Capital 

Total .■ 


$2,270 

- 

3,000 

-. 

2,900 

- 

3, 200 

- 

200 

- 

5° 

'- 

980 

- 

$1,600 
2,300 


$7,000 


1,700 


$12,600 


3,900 


$  8,700 


Form  4.   (a)  Balance  Sheet — Report  Form 


1 66 


FUNDAMENTALS  OF  ACCOUNTING 


Account  Form. 


£ 

H 

< 

W 

u 

w  • 

fc 

w 

t> 

(73 

p 

W 

« 
W 
« 

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c  -*->  •*-> 
P  £  f 

£  -§  ^  ^ 

CX  jV 

u 


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o    o    o 

0\      IN        <N 


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s  tf 


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u 


CX  tr> 

cd  5-> 

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o  .2 


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H 


PQ 


THE  FINANCIAL  STATEMENTS 


167 


The  account  form  of  balance  sheet  explained  is  shown  on  the 
preceding  page.  The  student  will  understand  that  a  business  con- 
cern adopts  for  use  either  one  form  or  the  other,  both  forms  never 
being  used  by  any  one  business.  An  account  form  of  the  Robert 
Duncan  balance  sheet  (Form  4b)  is  used  here  only  for  the  purpose 
of  illustration. 

Robert  Duncan 
Statement  of  Profit  and  Loss 
For  the  month  ended  March  31,  19 — 


Sales 

Cost  of  Goods  Sold: 

Purchases $7, 500 

Less:  Returned  Purchases 400 


Net  Purchases 

Add:  Inventory  3/1/ — . 


Total  Cost  of  merchandise  available  for  sale. 
Less:  Inventory  3/31/ — 


Cost  of  Goods  Sold . 


Gross  Profit  on  Sales 

Expenses : 

Rent 

Expense 

Furniture  and  Fixtures  (2%  decrease). 


Total . 
Net  Profit. 


$9,100 

$  7,100 

3,000 

— 

$10,100 

- 

3,200 

- 

6,900 

$2,200 

$  200 

- 

230 

- 

20 

— 

450 

$1,750 

Form  5.  Statement  of  Profit  and  Loss 


Inter-relation  of  the  Two  Statements. — Note  that  the  Robert 
Duncan  balance  sheet  cannot  be  proved  until  the  Net  Profit — the 
last  item  in  the  Capital  section — has  been  determined  in  the  profit 
and  loss  statement.     Capital  is  always  the  excess  of  assets  over 


168  FUNDAMENTALS  OF  ACCOUNTING 

liabilities.  On  March  31,  Duncan's  capital  was  $8,700.  Since 
his  capital  investment  on  March  1  was  $7,000,  it  has  increased 
$1,700  due  to  profits  less  withdrawals.  Since  a  record  has  been 
kept  on  the  ledger  of  all  changes  in  assets  and  liabilities  affecting 
capital,  this  record  may  be  compared  with  the  balance  sheet  to 
prove  its  correctness.  The  items  which  have  changed  capital 
are  indicated  in  the  P/L  column  of  the  trial  balance  on  page  164 
and  are  summarized  in  the  statement  of  profit  and  loss  on  page 
167.  The  amount  of  net  profit  or  net  increase  in  capital  shown 
by  this  statement  must  be  the  same  as  that  shown  by  the  balance- 
sheet.  This  matching  of  the  one  against  the  other,  is  considered 
a  good  proof  of  the  mechanical  accuracy  of  both  statements.  A 
difference  between  these  two  figures  is  evidence  of  an  error  at 
someplace. 

The  error  must  be  located  before  either  statement  can  be 
stated  to  be  correct.  Had  each  change  in  capital  been  recorded, 
as  it  occurred,  in  Duncan's  Capital  account,  that  account  would 
have  to  prove  against  the  excess  of  assets  over  liabilities.  Since, 
as  a  matter  of  convenience  in  recording  and  of  better  information 
as  to  business  operations  these  changes  have  been  kept  in  other 
accounts,  these  other  accounts  must  first  be  summarized  by 
means  of  the  profit  and  loss  statement  before  the  net  change  in 
Duncan's  capital  can  be  determined  and  his  capital  at  the  close  of 
the  period  (March  31)  known.  Thus  bookkeeping,  by  means  of 
the  trial  balance  and  the  two  financial  statements,  provides 
adequate  proof  of  the  mathematical  accuracy  of  the  record. 

Closing  the  Ledger. — The  purpose  of  closing  the  ledger  is  to 
clear  all  accounts  of  changes  that  affect  capital  and  to  prepare 
them  to  record  increases  and  decreases  during  the  next  period. 
This  is  done  by  first  recording  all  items  of  this  period  not  yet 
recorded  and  by  correcting  all  errors  which  the  trial  balance  or 
other  means  have  brought  to  light.  Then  the  accounts  which 
have  recorded  the  day-to-day  increases  and  decreases  in  capital 
must  be  transferred  to  the  Profit  and  Loss  account  or  summary. 


THE  FINANCIAL  STATEMENTS  169 

From  the  Profit  and  Loss  account  the  net  increase  (or  decrease) 
in  capital  is  transferred  to  the  proprietor's  Drawing  account, 
the  balance  of  which  is  then  transferred  to  his  Capital  account. 
The  ledger  (equation)  will  then  show  the  same  financial  condition 
as  the  balance  sheet. 

Note  that  the  Profit  and  Loss  account  serves  the  same  purpose 
in  the  ledger  that  the  profit  and  loss  statement  serves  outside  the 
ledger,  in  summarizing  the  capital  changes.  It  is  because  the 
statement  summarizes  the  changes  outside  the  ledger  and  proves 
its  accuracy  by  checking  its  results  against  that  shown  by  the 
balance  sheet,  that  it  is  best  to  make  the  statements  first  and  so 
free  the  ledger  record  from  errors  that  might  be  made  if  the  sum- 
mary were  first  made  in  the  ledger. 

Having  made  the  statements  first  and  proved  their  accuracy, 
we  shall  now  show  the  entries  necessary  to  close  the  ledger. 
These  are  numbered  from  1  to  1 5  and  should  be  traced  by  number 
and  date  to  the  various  accounts  affected  (see  Duncan's  ledger 
beginning  on  page  172)  and  should  also  be  compared  with  the 
statement  of  profit  and  loss  on  page  167.  Remember  that  the 
Merchandise  Trading  account  is  used  to  determine:  (1)  the  cost 
of  goods  sold,  and  (2)  the  gross  profit  on  sales.  This  is  ac- 
complished by  debiting  and  crediting  the  account  to  bring  about 
the  same  additions  and  subtractions  as  are  shown  in  the  Cost  of 
Goods  Sold  section  of  the  statement  of  profit  and  loss.  Thus 
entry  1  below,  transfers  to  Merchandise  Trading  the  net  pur- 
chases shown  by  the  Merchandise  Purchases  account  in  the  ledger 
and  also  used  in  the  statement,  $7,100.  Entry  2  adds  the  in- 
ventory of  March  1  to  the  amount  of  net  purchases  in  the  Mer- 
chandise Trading  account.  Entry  3  subtracts,  by  means  of  the 
credit  entry,  the  inventory  of  March  31,  the  balance  of  the  Mer- 
chandise Trading  account  now  showing  the  cost  of  the  goods  sold. 
In  this  way  the  student  by  following  the  statement  of  profit  and 
loss  as  a  guide  should  work  out  the  effect  of  each  of  these  fifteen 
entries  to  Duncan's  ledger  which,  for  convenience  of  reference, 
is  set  up  again  on  pages  172  to  175. 


170  FUNDAMENTALS  OF  ACCOUNTING 

i.  Credit  Merchandise  Purchases  S7.100  and  debit  Merchandise  Trading 
$7,100. 

To  transfer  the  net  cost  of  merchandise  purchased  during  March  to 
Merchandise  Trading  to  find  the  total  cost  of  merchandise  available  for  sale 
during  the  month. 

2.  Credit  Merchandise  Inventory  (old  account)  $3,000  and  debit  Mer- 
chandise Trading  $3,000. 

To  transfer  the  cost  of  the  inventory  of  merchandise  at  the  beginning 
of  the  month  to  Merchandise  Trading  account  for  the  purpose  of  finding 
the  total  cost  of  merchandise  available  for  sale  during  the  month. 

Note:  The  term  "old  account"  indicates  the  account  before  the  total 
rulings  are  made,  and  "new  account"  indicates  the  same  account  below 
the  total  rulings  ready  to  receive  the  new  period's  record. 

3.  Credit  Merchandise  Trading  $3,200  and  debit  Merchandise  Inventory 
(new  account)  $3,200. 

To  deduct  the  cost  of  merchandise  unsold  of  $3,200  (called  Inventory 
at  the  end)  from  the  total  cost  of  merchandise  for  the  purpose  of  finding 
the  cost  of  merchandise  sold  and  to  state  the  asset  of  merchandise  remain- 
ing unsold. 

4.  Credit  Merchandise  Trading  $6,900  and  debit  Merchandise  Trading 
$6,900  below  the  ruling,  that  is,  balance  Merchandise  Trading 
account. 

To  deduct  the  cost  of  merchandise  sold  ($6,900)  from  the  total  cost 
of  merchandise  for  the  purpose  of  separating  the  asset  sold  from  the  asset 
unsold  so  that  the  gross  profit  on  sales  may  be  obtained. 

5.  Debit  Merchandise  Sales  $9,100  and  credit  Merchandise  Trading 
$9,100. 

To  transfer  the  total  of  goods  sold  during  the  month  to  Merchandise 
Trading  account  for  the  purpose  of  finding  the  amount  of  the  gross  profit 
on  sales. 

6.  Debit  Merchandise  Trading  $2,200  and  credit  Profit  and  Loss 
$2,200. 

To  transfer  the  gross  profit  on  sales  to  Profit  and  Loss  for  the  pur- 
pose of  showing  the  gross  increase  in  capital  as  a  result  of  selling  mer- 
chandise. 

7.  Credit  Furniture  and  Fixtures  (old  account)  $20  and  debit  Profit  and 
Loss  $20. 

To  transfer  the  amount  of  furniture  and  fixtures  consumed  to  Profit 


THE  FINANCIAL  STATEMENTS  1 71 

and  Loss  for  the  purpose  of  showing  the  amount  to  be  deducted  from  the 
gross  profit. 

8.  Credit  Furniture  and  Fixtures  (old  account)  $980  and  debit  Furniture 
and  Fixtures  (new  account)  $980,  i.e.,  balance  Furniture  and  Fixtures 
account. 

To  state  the  amount  of  the  asset,  Furniture  and  Fixtures,  remaining 
after  deducting  the  amount  consumed.  The  only  advantage  in  making 
this  entry  is  to  state  in  one  amount  the  value  of  the  furniture  and  fix- 
tures remaining.  The  word  "inventory"  may  be  used  instead  of 
"balance." 

9.  Credit  Rent  (old  account)  $200  and  debit  Profit  and  Loss  $200. 

To  transfer  the  amount  of  rent  consumed  to  Profit  and  Loss  for  the 
purpose  of  showing  the  amount  to  be  deducted  from  the  gross  profit. 

10.  Credit   Rent  (old  account)   $200    and  debit  Rent   (new  account) 
$200. 

To  state  the  amount  of  rent  remaining  after  deducting  the  amount  of 
rent  consumed. 

11.  Credit  Expenses  (old)  $340  and  debit  Profit  and  Loss  $340. 

To  transfer  the  amount  of  expense  consumed  to  Profit  and  Loss  for 
the  purpose  of  showing  the  amount  which  is  to  be  deducted  from  gross 
profit. 

12.  Credit  Expense  (old)  $50  and  debit  Expense  (new)  $50. 

To  state  the  amount  of  expense  remaining  after  deducting  the  amount 
of  expense  consumed. 

13.  Debit  Profit  and  Loss  $1,750  and  credit  Robert  Duncan,  Drawing 

$1,750. 

To  transfer  the  net  profit  to  the  proprietor's  Drawing  account  to  find 
the  net  increase  in  capital. 

14.  Debit  Robert  Duncan,  Drawing  $1,700  and  credit  Robert  Duncan, 
Capital  $1,700. 

To  transfer  the  net  increase  in  capital  to  Robert  Duncan,  Capital 
account  to  show  the  present  capital. 

15.  Debit  Robert  Duncan,  Capital  (old)  $8,700  and  credit  Robert  Duncan, 
Capital  (new)  $8,700. 

To  state  in  one  amount  the  present  capital  after  adding  the  net  profit 
to  the  previous  capital.  Instead  of  using  the  word  "balance,"  one  of  the 
following  terms  may  be  used:  net  capital,  present  capital,  capital,  net 
worth,  present  worth,  net  investment,  present  investment,  etc. 


172 


FUNDAMENTALS  OF  ACCOUNTING 


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The  Post-Closing  Trial  Balance. — In  closing  the  ledger,  errors 
may  be  made  in  recording  the  transfers  from  one  account  to 
another  which  will  throw  the  ledger  out  of  balance,  i.e.,  the 
equation  will  not  be  in  equilibrium.  To  test  the  accuracy  of  the 
closing  transfer  entries  and  to  afford  a  means  of  comparing  the 
assets,  liabilities,  and  capital  in  the  balance  sheet  with  the  same 
items  in  the  ledger  (equation),  it  is  customary  to  prepare  another 
trial  balance  after  closing  the  ledger,  called  a  "trial  balance  after 
closing,"  or  a  " post-closing  trial  balance."  It  is  prepared  in 
exactly  the  same  way  as  other  trial  balances;  i.e.,  all  accounts  that 
balance  are  omitted  and  only  the  debit  or  credit  balances  of  the 
others  are  shown.  The  post-closing  trial  balance  of  Robert 
Duncan's  ledger  is  given  on  the  next  page. 


176  FUNDAMENTALS  OF  ACCOUNTING 

Robert  Duncan,  Post-Closing  Trial  Balance.  March  31,     19- 


Cash 

Notes  Receivable 

C.  F.  Andrews ' 

Ellsworth  and  Company 

Foster  and  Flynn 

Merchandise  Inventory . 
Furniture  and  Fixtures . 

Notes  Payable 

L.  E.  Howe 

Dean  and  Johnson 

Robert  Duncan,  Capital 

Rent 

Expense 


2,270 
3.000 
1,400 
500 
1,000 
3,200 


200 
50 


Si  2,600 


1,600 
1,200 
1,100 

8,700 


$12,600 


Comparison  with  the  Balance  Sheet. — The  balance  sheet  and 
the  post-closing  trial  balance  should  now  be  compared.  The 
balance  sheet  shows  the  present  amount  of  each  of  the  assets, 
liabilities,  and  capital,  as  well  as  the  total  amount  of  each 
group.  The  post-closing  trial  balance  shows  them  as  they  are 
arranged  in  the  ledger  for  the  purpose  of  collecting  increases  and 
decreases  during  the  next  period.  To  test  the  totals  of  the  post- 
closing  trial  balance,  see  if  they  agree  with  the  totals  of  the 
balance  sheet.  Since  the  debit  side  of  the  ledger  after  closing 
shows  only  asset  balances,  the  total  of  the  debits  of  the  post- 
closing  trial  balance  should  be  the  same  as  the  total  assets  in  the 
balance  sheet.  Similarly,  since  liabilities  and  capital  appear  as 
credits  in  the  ledger,  the  sum  of  the  liabilities  and  capital  in  the 
balance  sheet  should  be  the  same  as  the  credit  total  of  the  post- 
closing  trial  balance.  Every  item  in  the  balance  sheet  should  be 
compared  with  the  corresponding  item  in  the  post-closing  trial 
balance.  In  comparing  Accounts  Receivable  the  sum  of  the 
debit  balances  of  customers'  accounts  in  the  post-closing  trial 
balance  should  agree  with  the  item,  Accounts  Receivable,  on  the 


THE  FINANCIAL  STATEMENTS  177 

balance  sheet.  In  like  manner  the  sum  of  the  individual  credi- 
tors' balances  should  agree  with  the  Accounts  Payable  item  in  the 
balance  sheet.  After  proving  the  ledger  by  this  comparison,  it  is 
considered  correct  and  ready  to  receive  the  next  period's  record 
of  business  operations. 

Ruling  Accounts. — In  all  horizontal  ruling  in  the  ledger  single 
lines  are  ruled  across  the  money  columns  to  indicate  that  all 
amounts  above  the  lines  are  to  be  added,  the  totals  appearing  just 
below  the  lines.  Note  that  the  lines  across  the  debit  and  credit 
money  columns  of  an  account  are  always  on  the  same  horizontal 
line  or  level.  Double  lines  indicate  that  the  debit  and  credit 
amounts  in  the  account  above  the  ruling  are  equal  and  that 
portion  of  the  account  is  complete  or  in  balance.  The  double 
lines  are  generally  ruled  just  under  the  totals  and  usually  cross  all 
vertical  columns  except  the  explanation  columns.  There  are 
many  other  forms  of  ruling,  but  none  so  generally  used  as  this, 
which  is  the  standard  form.  It  will  be  used  throughout  this  work. 
The  single  lines  should  be  ruled  on  the  last  line  on  which  an 
amount  of  money  appears  and  the  double  lines  usually  one  line 
lower.     Note  the  ruling  in  the  following  accounts. 

Although  frequently  done,  it  is  not  necessary  to  "balance" 
the  Cash  account,  or  any  other  account  that  does  not  contain 
an  increase  or  decrease  in  capital.  The  Cash  account  in  this 
ledger  is  balanced  to  illustrate  how  it  appears  when  balanced. 
If  the  account  is  "balanced,"  it  states  in  one  amount  the  amount 
of  the  asset  remaining  with  which  to  begin  the  operations  of  the 
next  period. 

Merchandise  Inventory  account  shows  double  lines  only. 
Since  there  is  only  one  item  on  each  side,  it  is  not  necessary  to  rule 
single  lines  for  adding — the  item  is  the  total. 

The  Standard  Furniture  Company  account  is  ruled  the 
same  as  the  Merchandise  Inventory  account,  but  it  is  now 
ended — dead — and,  of  course,  does  not  appear  in  the  trial 
balance. 


178  FUNDAMENTALS  OF  ACCOUNTING 

Formerly  red  ink  was  used  for  all  horizontal  ruling.  There  is 
no  particular  advantage  in  this,  however,  black  ink  serving 
equally  well.  Time  is  wasted  in  changing  from  one  pen  to  an- 
other. The  tendency  at  present  is  to  avoid  the  use  of  red  ink  or 
any  color  other  than  that  used  to  record  the  regular  entries. 

Use  of  Dashes  in  Cents  Column. — If  the  cents  column  is  left 
blank  when  an  amount  is  entered  in  the  dollars  column,  one  can- 
not tell  whether  the  amount  contained  only  dollars,  or  dollars  and 
cents,  the  cents  being  omitted  through  error.  To  indicate  that 
there  are  no  cents  in  the  amount,  various  devices  are  used. 
Some  write  two  ciphers  (oo)  in  the  cents  column ;  others  place  a 
cross  ( X )  there  and  still  others  enter  a  dash  ( — ) .  The  objection 
to  ciphers  is  that  they  may  be  poorly  made  and  thus  cause  errors 
by  being  mistaken  for  other  figures.  The  same  objection  applies 
to  the  cross.  The  dash  is  easily  and  quickly  made,  does  not 
interfere  with  addition,  and  cannot  be  mistaken  for  some  other 
figure.     It  will  accordingly  be  used  throughout  this  work. 

Questions 

i.  (a)  What  is  a  balance  sheet? 

(b)  From  what  may  it  have  derived  its  name? 

2.  (a)  Name  the  two  forms  of  balance  sheet? 

(b)  Explain  the  arrangement  of  the  information  in  each. 

3.  What  is  the  purpose  of  a  profit  and  loss  statement? 

4.  Why  is  "financial  statement"  objectionable  when  used  as  a  title 
in  place  of  "balance  sheet"? 

5.  What  is  meant  by  "closing  the  ledger"? 

6.  Explain  the  two  plans  of  procedure  in  preparing  the  statements. 

7.  What  are  some  of  the  advantages  of  preparing  the  financial  state- 
ments before  closing  the  ledger? 

8.  What  information  in  addition  to  that  contained  in  the  trial  balance 
is  necessary  to  prepare  the  financial  statements? 

9.  Explain  a  plan  for  preparing  the  financial  statements  from  the  trial 
balance  and  inventories  or  additional  information. 

10.  Explain  the  inter-relation  between  the  balance  sheet  and  profit 
and  loss  statement. 


THE  FINANCIAL  STATEMENTS  179 

ii.  (a)  Does  the  agreement  of  the  net  profit  as  shown  on  the  profit  and 
loss  statement  and  the  balance  sheet  prove  that  the  accounting  has  been 
correctly  done?     Why? 

(b)  What  does  the  agreement  prove? 

12.  What  is  the  purpose  of  closing  the  ledger? 

13.  What  two  things  are  shown  on  the  ledger  by  means  of  the  Mer- 
chandise Trading  account? 

14.  (a)  What  accounts  are  transferred  to  the  Merchandise  Trading 
account? 

(b)  Into  what  account  is  the  Merchandise  Trading  account  closed? 

15.  Prepare  a  Merchandise  Trading  account.  Provide  the  names  and 
amounts  and  show  the  account  closed. 

16.  (a)  What  accounts  are  transferred  to  the  Profit  and  Loss  account? 
(b)  Into  what  account  is  the  Profit  and  Loss  account  closed? 

Why? 

17.  Prepare  a  Profit  and  Loss  account.  Provide  the  names  and 
•amounts  and  show  the  account  closed. 

18.  (a)  What  does  the  Drawing  account  contain? 

(b)  To  what  account  is  the  debit  or  credit  excess  in  this  account 
usually  transferred? 

(c)  Under  what  conditions  would  the  debit  or  credit  excess  in 
this  account  not  be  transferred  to  another  account? 

19.  Prepare  a  Drawing  account?  Provide  the  items  and  show  the 
account  closed:  (a)  with  a  credit  excess,  and  (b)  with  a  debit  excess. 

20.  (a)  What  is  the  purpose  of  closing  the  Capital  account? 

(b)  What  words  may  be  substituted  for  "balance"  in  closing  this 
account? 

21.  Prepare  a  Capital  account.  Provide  the  items  and  show  the  ac- 
count closed. 

22.  Name  the  steps  taken  in  closing  the  ledger,  giving  the  accounts 
affected  in  regular  order? 

23.  (a)  What  is  a  post-closing  trial  balance? 

(b)  Why  is  it  prepared? 

(c)  What  other  names  are  given  to  this  trial  balance? 

24.  With  what  financial  statement  can  the  post-closing  trial  balance  be 
compared? 

25.  (a)  Why  must  the  total  debits  in  the  post-closing  trial  balance 
agree  with  the  total  assets  in  the  balance  sheet? 

(b)  With  what  must  the  credits  in  this  trial  balance  agree?    Why? 

26.  With  what  accounts  in  the  trial  balance  must  the  item  of  Accounts 
Receivable  in  the  balance  sheet  agree?    Accounts  Payable? 


180  FUNDAMENTALS  OF  ACCOUNTING 

27.  (a)  What  is  the  purpose  of  ruling  single  horizontal  lines  in  an  ac- 
count? 

(b)  Across  what  columns  do  they  extend? 

28.  (a)  What  is  the  purpose  of  ruling  double  horizontal  lines  in  an 
account? 

(b)  Across  what  columns  do  they  extend? 

29.  How  should  each  of  the  following  accounts  be  ruled? 

(a)  An  account  containing  only  one  debit  and  credit,  both  the 
same  amount. 

(b)  An  account  containing  four  debits  and  two  credits,  having 
equal  totals. 

30.  What  is  meant  by  "balancing"  an  account? 

31.  Is  the  use  of  red  ink  necessary?     Why? 

32.  Why  are  dashes  ( — )  used  in  the  cents  column? 

Problems 

1.  (a)  Rule  one  sheet  of  letter-size  paper  in  the  ledger  form  and  num- 
ber the  pages  "  1 "  and  "  2  ";  and  then  record  the  following  transactions: 
Open  accounts  arranged  in  proper  order  and  allow  lines  as  follows :  Cash  9, 
Merchandise  Inventory  4,  Merchandise  Purchases  6,  Merchandise  Sales 
6,  Furniture  and  Fixtures  3,  John  C.  Scovill  4,  Roy  M.  Martin  3,  Expense 
5,  Henry  L.  Holt,  Capital  7,  Merchandise  Trading  8,  Profit  and  Loss  5. 

June,  19— 

1.  Henry  L.  Holt  began  business  with  $5,000  in  cash;  $6,000  in  mer- 
chandise; and  $1,000  in  furniture  and  fixtures. 

3.     Sold  merchandise  on  account  to  John  C.  Scovill  $2,000. 

5.  Sold  merchandise  to  T.  E.  Davis  for  cash  $500. 

6.  Paid  cash  of  $400  for  clerks'  salaries. 

7.  Bought  merchandise  on  account  from  Roy  M.  Martin  $1,500. 

8.  Sold  merchandise  on  account  to  John  C.  Scovill  $200. 

10.    Received  cash  from  John  C.  Scovill  paying  for  merchandise  pur- 
chased June  3,  $2,000. 
12.     Bought  merchandise  from  Roy  M.  Martin  for  cash  $2,500. 

14.  Paid  cash  of  $400  for  clerks'  salaries. 

15.  Bought  merchandise  from  Harry  Day  for  cash  $750. 

(b)  Pencil  foot  each  account  and  enter  differences  in  small  pencil 
figures. 

(c)  Prepare  a  trial  balance  of  differences. 

(d)  On  June  15  there  was  merchandise  unsold  of  $9,200.  All  of  the 
expense  assets  were  consumed. 


THE  FINANCIAL  STATEMENTS  l8l 

(e)  From  the  trial  balance  and  inventory  prepare: 

i.  Balance  sheet 

2.  Statement  of  profit  and  loss 

(f)  Close  the  ledger  and  prepare  a  post-closing  trial  balance. 

2.  (a)  Record  the  following  transactions  in  the  ledger.  One  sheet  of 
ledger  paper  is  required.  Open  accounts  arranged  in  proper  order  and 
allow  lines  as  follows:  Cash  6,  Merchandise  Inventory  4,  Merchandise 
Purchases  3,  Merchandise  Sales  6,  Daly  McCoy  3,  Horace  Newman  3, 
Furniture  and  Fixtures  5,  Expense  3,  Crosby  Furniture  Company  3,  Laid- 
law  and  Gordon  3,  Davis  L.  Crowe,  Capital  6,  Merchandise  Trading  8, 
Profit  and  Loss  5,  Davis  L.  Crowe,  Drawing  4. 

January,  19 — 

1.     Davis  L.  Crowe  began  business  with  $3,000  cash  and  $5,000  in 
merchandise. 

4.  Bought  furniture  and  fixtures  of  Crosby  Furniture  Company,  on 

account,  $1,100. 

5.  Sold  merchandise,  on  account,  to  Daly  McCoy  $1,200. 
7.     Sold  merchandise  of  $800  for  cash. 

10.     Paid  clerks'  salaries  in  cash  $200. 

12.     Sold  merchandise,  on  account,  to  Horace  Newman  $985. 

14.  Daly  McCoy  returned  $225  of  the  merchandise  purchased  Janu- 

ary 5,  as  unsatisfactory. 

15.  Purchased  merchandise  from  Laidlaw  and  Gordon,  on  account, 

$1,800. 
17.     Withdrew  cash  for  personal  use  $70. 

(b)  Prepare  a  trial  balance  of  differences.  Make  sure  you  have 
entered  the  small  pencil  footings  and  that  you  indicated  the  difference  in 
small  pencil  figures  on  the  larger  side  of  each  account. 

(c)  On  January  15  there  was  merchandise  unsold  of  $4,765.  All  of  the 
expense  asset  ($200)  was  consumed  in  conducting  the  business,  and  fur- 
niture and  fixtures  decreased  in  value  $22  on  account  of  use. 

(d)  From  the  trial  balance  and  inventory  prepare: 

1.  Balance  sheet 

2.  A  statement  of  profit  and  loss 

(e)  Close  the  ledger  and  prepare  a  post-closing  trial  balance. 

3.  (a)  Record  the  following  transactions  in  the  ledger.  One  sheet 
of  ledger  paper  is  required.  Open  accounts  arranged  in  proper  order  and 
allow  lines  as  follows:  Cash  10,  Merchandise  Inventory  5,  Furniture  and 


1 82  FUNDAMENTALS  OF  ACCOUNTING 

Fixtures  6,  Merchandise  Sales  6,  Merchandise  Purchases  5,  Mason  and 
Dunn  3,  Dyson  and  Reed  3,  Expense  4,  Robert  Larson  and  Company  3, 
James  L.  Oxford,  Capital  5,  Merchandise  Trading  8,  Profit  and  Loss  6, 
James  L.  Oxford,  Drawing  5. 

March,  19 — 

1.  James  L.  Oxford  began  business  with  $5,000  cash  and  $5,000  in 

merchandise. 

2.  Bought  furniture  and  fixtures  from  Carpenter  Furniture  Com- 

pany for  cash  $1,200. 

3.  Paid  cash  of  $200  to  Jamison  Realty  Company  for  rent  of  store 

for  month  of  March. 
7.    Sold  merchandise  to  Mason  and  Dunn  on  account  $2,500. 

10.     Paid  cash  of  $600  for  salaries. 

14.     Sold  merchandise  to  Dyson  and  Reed  on  account  $800. 

20.  Bought  merchandise  on  account  from  Robert  Larson  and  Com- 
pany $3,000.  Withdrew  for  personal  use,  cash  $40;  merchan- 
dise $50. 

24.    Bought  merchandise  for  cash  from  D.  E.  Hughes  $1,400. 

28.    Sold  merchandise  to  Mason  and  Dunn  for  cash  $900. 

31.  Paid  cash  of  $250  to  Burroughs  Adding  Machine  Company  for  an 
adding  machine. 

(b)  Enter  totals  and  differences  in  small  pencil  figures,  after  which 
prepare  a  trial  balance  of  differences. 

(c)  On  March  31  there  was  merchandise  unsold  of  $6,500.  All  of  the 
expense  assets  were  consumed  and  $12  of  the  furniture  and  fixtures  were 
consumed  in  operating. 

(d)  From  the  trial  balance  and  inventory  prepare : 

1.  Balance  sheet 

2.  Statement  of  profit  and  loss 

(e)  Close  the  ledger  and  prepare  a  post-closing  trial  balance. 

4.  (a)  Record  the  following  transactions  in  the  ledger.  One  sheet 
of  ledger  paper  is  required.  Arrange  the  accounts  in  the  proper  order  and 
give  each  account  the  specified  number  of  lines:  Cash  10,  William  C. 
Glasgow  3,  Nagel  Electric  Co.  3,  Merchandise  Inventory  4,  Merchandise 
Purchases  3,  Merchandise  Sales  7,  Rent  3,  Expense  6,  Furniture  and 
Fixtures  6,  Huntington  Furniture  Co,  3,  Lexington  Sales  Co.  3,  James  H. 
Hallowell,  Capital  7,  James  H.Hallowell, Drawing  5,  Merchandise  Trading 
8,  Profit  and  Loss  5. 


THE  FINANCIAL  STATEMENTS  1 83 

December,  19 — 

15.  James  H.  Hallowell  started  business  with  cash  of  $2,500  and 

merchandise  of  $4,750. 

16.  Bought    furniture    and    fixtures    from    Huntington    Furniture 

Company,  on  account,  $575. 

17.  Paid  cash  for  dray  age  $3.     Paid  cash  for  rent  $20. 

18.  Sold  merchandise  to  William  C.  Glasgow,  on  account,  $1,574. 

19.  Paid  cash  for  salaries  $275. 

21.     Sold  merchandise  to  H.  N.  Furnald  for  cash  $820. 

23.  Returned  a  desk  purchased  from  Huntington  Furniture  Company 

on  the  16th,  because  it  was  broken  when  delivered,  $32. 

24.  Made  sundry  sales  for  cash  $1,720. 
26.     Paid  cash  for  postage  $20. 

28.  Bought  a  typewriter  from  Remington  Typewriter  Company  for 

cash  $100.     Withdrew  merchandise  for  personal  use  $55. 

29.  Bought  merchandise  from  the  Lexington  Sales  Company,  on 

account,  $2,200. 

30.  Withdrew  cash  for  personal  use  $60.     Paid  cash  for  January  rent 

in  advance  $40. 

31.  Sold  merchandise  to  Nagel  Electric  Company,  on  account,  $985. 

(b)  Enter  differences  in  small  pencil  figures,  after  which  prepare  a  trial 
balance. 

(c)  Merchandise  inventory  on  December  31  was  $2,000.     All  expense 
assets  were  consumed  except  prepaid  rent  of  $40. 

(d)  Prepare: 

1.  Balance  sheet 

2.  Statement  of  profit  and  loss 

(e)  Close  the  ledger  and  prepare  a  post-closing  trial  balance. 

5.  (a)  Record  the  following  transactions  in  the  ledger.  Two  sheets 
of  ledger  paper  are  required.  Arrange  the  accounts  in  the  proper  order 
and  give  each  account  the  specified  number  of  lines:  Cash  n,  Notes 
Receivable  3,  Frank  E.  Hess  3,  Merchandise  Inventory  4,  Merchandise 
Purchases  5,  Merchandise  Sales  5,  Furniture  and  Fixtures  6,  Securities 
5,  Rent  6,  Expense  5,  H.  L.  Pogue  5,  L.  M.  Carpenter  and  Company  3, 
George  W.  Mc Alpine  Company  3,  Underwood  Typewriter  Company  3, 
Richard  L.  Winslow,  Capital  7,  Merchandise  Trading  8,  Profit  and  Loss  7, 
Richard  L.  Winslow,  Drawing  6. 
October,  19 — 

1.     Richard  L.  Winslow  started  business  with  cash  of  $5,000;  $3,000 
in  stocks  and  bonds;  merchandise  $2,000. 


1 84  FUNDAMENTALS  OF  ACCOUNTING 

2.  Paid  rent  to  December  31,  $600  cash. 

3.  Bought  merchandise  from  H.  L.  Pogue,  on  account,  $5,000. 

4.  Bought  furniture  and  fixtures  from  L.  M.  Carpenter  and  Com- 

pany, on  account,  $1,300. 
6.     Paid  cash  for  express  and  drayage  $25. 

8.  Sold  merchandise  to  Frank  E.  Hess,  on  account,  $3,000. 

9.  Returned  merchandise  to  H.  L.  Pogue,  because  it  was  damaged 

in  transportation,  $500.     Made  an  additional  investment  of 
$2,000  cash  in  the  business. 

10.  Sold  merchandise  for  cash  $1,200. 

1 1 .  Bought  merchandise  from  the  George  W.  McAlpine  Company,  on 

account,  $1,000. 

13.     Paid  H.  L.  Pogue  the  balance  of  his  account  in  cash  $4,500. 

15.  Bought  a  new  typewriter  from  the  Underwood  Typewriter  Com- 
pany, on  account,  $95. 

18.  Frank  E.  Hess  paid  his  account  by  giving  his  30-day  note  for 
$3,000. 

25.  Paid  the  George  W.  McAlpine  Company  $1,000  for  invoice  of  the 
nth. 

30.  Paid  cash  for  miscellaneous  expense  $100. 

3 1 .  Withdrew  for  personal  use :  cash  $  100 ;  merchandise  $80. 

(b)  Enter  totals  and  differences  in  small  pencil  figures,  after  which 
prepare  a  trial  balance. 

(c)  Merchandise  inventory  on  October  31  was  $3,000.  All  expense 
assets  were  consumed  except  2  months'  rent  $400.  The  furniture  and 
fixtures  decreased  $13  in  value  in  operating. 

(d)  From  the  trial  balance  and  the  above  information  prepare: 

1.  Balance  sheet 

2.  Statement  of  profit  and  loss 

(e)  Close  the  ledger  and  prepare  a  post-closing  trial  balance. 

6.  (a)  Record  the  following  transactions  in  the  ledger.  Two  sheets 
of  ledger  paper  are  required.  The  number  after  the  name  of  the  account 
indicates  the  number  of  lines  to  be  allowed  for  that  account.  Arrange  the 
accounts  in  the  proper  order:  Cash  n,  Henry  Stanley  6,  B.  S.  Young  5, 
Notes  Receivable  3,  Merchandise  Inventory  4,  Merchandise  Purchases 
8,  Merchandise  Sales  9,  Furniture  and  Fixtures  6,  Rent  6,  Expense  5, 
Barton  and  Company  7,  Jacob  Gold  3,  Notes  Payable  3,  P.  T.  Barnum, 
Capital  6,  Merchandise  Trading  8,  Profit  and  Loss  7,  P.  T.  Barnum, 
Drawing  7. 


THE  FINANCIAL  STATEMENTS  1 85 

June,  19 — 

1.     P.  T.  Barnum  began  business  with  $6,000  in  cash,  $7,000  in 
merchandise,  and  $1,200  in  furniture  and  fixtures. 

3.  Sold  merchandise  to  Henry  Stanley,  on  account,  $1,400. 

4.  Bought  merchandise  from  Barton  and  Company,  on  account, 

$1,100. 
7.     Henry  Stanley  returned  merchandise  from  sale  of  the  3d  to  the 
amount  of  $200,  because  it  was  not  the  proper  quality. 
10:     Sold  to  B.  S.  Young  merchandise,  on  account,  $2,900.     Sold 
merchandise  to  Henry  Stanley,  on  account,  $1,700. 

12.  Bought  merchandise  from  Jacob  Gold,  on  account,  $2,100. 

13.  Paid  Barton  and  Company  by  check  in  full  for  invoice  of  6/4/ — , 

$1,100. 

14.  Withdrew  merchandise  for  personal  use  $40.     Sold  merchandise 

for  cash  $1,500. 

15.  Received  check  from  Henry  Stanley  in  full  for  sale  of  6/3/ — , 

$1,200.     Bought  merchandise  from  Barton  and  Company,  on 
account,  $1,600. 

16.  Withdrew  cash  for  personal  use  $75. 

(b)  Prepare  a  trial  balance  of  differences.  Make  sure  you  have  en- 
tered the  small  pencil  footings  and  that  you  indicated  the  difference  in 
small  pencil  figures  on  the  larger  side  of  each  account. 

7.  (a)  The  following  transactions  represent  a  continuation  of  the 
business  of  P.  T.  Barnum.  Record  in  the  ledger  used  for  Problem  6  and 
open  the  following  additional  accounts:  Notes  Receivable  3,  Furniture 
and  Fixtures  6,  Rent  6,  Expense  5,  Notes  Payable  3,  Merchandise  Trading 
8,  Profit  and  Loss  7. 

June,  19 — 

17.  Paid  Barton  and  Company  by  check  for  sale  of  6/15/ —  $1,600. 

18.  Inherited  $3,000  in  cash  which  he  invested  in  the  business. 

19.  Received  from  B.  S.  Young  in  payment  of  sale  of  the  10th,  cash 

$1,900  and  his  30-day  note  for  $1,000. 

20.  Paid  Fulton  and  Company  by  check  $350  for  rent  for  June  and 

July. 

21.  Sold  merchandise  to  B.  S.  Young,  on  account,  $2,100. 

22.  Bought  merchandise  from  Barton  and  Company,  on  account, 

$1,700. 

23.  Withdrew  for  personal  use;  merchandise  $35;  cash  $55. 

24.  Paid  clerks'  salaries  in  cash  $150. 


186  FUNDAMENTALS  OF  ACCOUNTING 

25.  Returned  $300  in  merchandise  to  Barton  and  Company  from 
purchase  of  June  22  because  a  certain  part  of  the  order  had 
been  filled  twice. 

27.  Paid  cash  for  office  supplies  $80. 

28.  Gave  Jacob  Gold  30-day  note  for  $1,100  in  part  payment  of  pur- 

chase of  the  12th. 

29.  Sold  merchandise  to  Henry  Stanley,  on  account,  $3,000. 

30.  Bought  merchandise  from  Barton  and  Company,  on  account, 

$1,200. 

(b)  Pencil  foot  each  account  and  enter  differences  in  small  pencil  fig- 
ures, after  which  prepare  a  trial  balance. 

(c)  An  inventory  on  June  30  showed  merchandise  on  hand  $6,800;  rent 
paid  in  advance  1  month  $175;  furniture  and  fixtures  valued  at  $1,190. 

(d)  From  the  trial  balance  and  inventories  prepare: 

1.  Balance  sheet 

2.  Statement  of  profit  and  loss 

(e)  Close  the  ledger  and  prepare  a  post-closing  trial  balance. 

8.  (a)  Record  the  following  transactions  in  the  ledger.  Two  sheets 
of  ledger  paper  are  required.  Give  each  account  the  specified  number  of 
lines:  Cash  15,  James  W.  Riley  5,  Merchandise  Inventory  4,  Merchandise 
Purchases  6,  Merchandise  Sales  9,  Furniture  and  Fixtures  6,  Rent  3,  Ex- 
pense 9,  F.  L.  Lowell  3,  Maurice  P.  Kirby,  Capital  5,  Maurice  P.  Kirby, 
Drawing  5. 

November,  19 — 

1.  Maurice  P.  Kirby  began  business  with  $2,000  cash;  $4,000  mer- 

chandise; $900  furniture  and  fixtures. 

2.  Paid  cash  for  1  month's  rent  $150. 

4.  Sold  merchandise,  on  account,  to  James  W.  Riley  $1,200. 

7.  Paid  cash  for  clerks'  salaries  $125. 

10.  Bought  merchandise,  on  account,  from  F.  L.  Lowell  $1,500. 

12.  James  W.  Riley  returned  merchandise  of  $225  because  it  was  not 

the  quality  ordered. 

13.  Paid  cash  for  advertsing  $25. 

14.  Received  check  of  $975  from  James  W.  Riley,  paying  for  the 

goods  purchased  on  the  4th  less  return  of  merchandise  on  the 
12th. 

15.  Sold  merchandise  for  cash  $850.     Withdrew  cash  for  personal 

use  $50. 


THE  FINANCIAL  STATEMENTS  187 

(b)  Enter  totals  and  differences  in  small  pencil  figures,  after  which 
prepare  a  trial  balance. 

9.  (a)  The  following  transactions  represent  a  continuation  of  the 
business  of  Maurice  P.  Kirby.  Record  in  the  ledger  used  for  Problem  8 
and  open  these  additional  accounts:  Jonas  Quibble  3,  Notes  Receivable  3, 
Delivery  Equipment  3,  Overland  Motor  Car  Company  3,  Harper  Sales 
Company  3. 

November,  19 — 

16.  Paid  F.  L.  Lowell  by  check  in  full  for  merchandise  purchased 

11/10/ — ,$1,500. 

17.  Sold  merchandise  of  $1,200  to  H.  M.  Mattingly,  accepting  his 

30-day  note  in  payment. 

1 8.  Bought  a  delivery  car  from  the  Overland  Motor  Car  Company,  on 

account,  $1,000. 

19.  Paid  cash  for  office  supplies  $65. 

20.  Bought  merchandise  from  Harper  Sales  Company,  on  account, 

$2,000. 

21.  Paid  cash  for  clerks'  salaries  $125. 

22.  Sold  merchandise  to  Jonas  Quibble,  on  account,  $1,995. 

2^.     Returned  merchandise  to  Harper  Sales  Company  $350  because  of 
incorrect  sizes.     Paid  personal  gas  bill  in  cash  $7.45. 

(b)     Enter  totals  and  differences  in  small  pencil  figures  after  which 
prepare  a  trial  balance. 

10.  (a)  The  following  transactions  represent  a  continuation  of  the 
business  of  Maurice  P.  Kirby.  Record  in  the  ledger  used  for  Problems  8 
and  9  and  open  these  additional  accounts:  Henry  T.  Monroe  3,  Building 
3,  Insurance  3,  Dixon,  Smith  and  Company  3,  Mortgage  Payable  3, 
Merchandise  Trading  7,  Profit  and  Loss  7. 

November,  19 — 

24.  Sundry  sales  of  merchandise  for  cash  $2,600. 

25.  Bought  merchandise  from   Dixon,   Smith   and   Company,   on 

account,  $2,900. 

26.  Bought  the  building  he  occupies  from  L.  R.  Smith  Realty  Com- 

pany for  $12,000,  paying  $2,000  cash  and  a  mortgage  on  the 
property  for  $10,000. 

27.  Donated  $50  in  merchandise  to  the  Salvation  Army.     Paid  cash 

for  miscellaneous  expense  $125. 

28.  Received  check  from  Jonas  Quibble  paying  his  account  in  full 

$i.99S- 


1 88  FUNDAMENTALS  OF  ACCOUNTING 

29.  Drew  cash  for  personal  use  $150.     Sold  merchandise  to  Henry  T. 

Monroe,  on  account,  $1,300. 

30.  Paid  cash  for  insurance  of  building  from  December  1,  19 — ,  to 

December  1,  19 — ,  $150. 

(b)  Enter  totals  and  differences  in  small  pencil  figures,  after  which 
prepare  a  trial  balance. 

(c)  On  November  30  there  was  merchandise  unsold  of  $4,046.  The 
following  expense  assets  were  consumed  in  operating  the  business:  rent 
$150;  clerks' salaries  $250;  advertising  $10;  office  supplies  $25;  miscellan- 
eous expense  $1 25 ;  furniture  and  fixtures  1%  of  cost  price  $9. 

(d)  From  the  trial  balance  and  inventories  prepare: 

1.  Balance  sheet 

2.  Statement  of  profit  and  loss 

(e)  Close  the  ledger  and  prepare  a  post-closing  trial  balance. 

11.  (a)  Record  the  following  transactions  in  the  ledger.  Two  sheets 
of  ledger  paper  are  required.  Number  the  pages  1,2,3,4.  Arrange  the 
accounts  in  the  proper  order  and  give  each  account  the  specified  number 
of  lines:  Cash  10,  L.  D.  Watterbury  3,  Merchandise  Inventory  4,  Mer- 
chandise Purchases  3,  Merchandise  Sales  6",  Furniture  and  Fixtures  4, 
Real  Estate  4,  Taxes  5,  Expense  8,  Donations  3,  Gray  and  Crosby  3, 
Burroughs  Adding  Machine  Company  3,  J.  L.  Hervey  3,  Notes  Payable  3, 
Clarence  V.  Dynes,  Capital  6,  Merchandise  Trading  8,  Profit  and  Loss  7, 
Clarence  V.  Dynes,  Drawing  6. 

April,  19— 

1.     Clarence  V.  Dynes  started  business  with  cash  $5,000;  merchan- 
dise $10,000;  real  estate  $30,000;  furniture  and  fixtures  $1,200. 
5.     Sold  merchandise  to  L.  D.  Watterbury  and  Son,  on  account, 

$6,000. 
7.     Sold  merchandise  to  Henry  J.  Hyler  for  cash  $1,800. 
Made  his  daughter  a  birthday  gift  of  $50  in  cash. 
Paid  cash  for  taxes  from  April  15,  1919,  to  April  15,  1920,  $240. 
Bought  office  supplies  from  J.  L.  Hervey,  on  account,  $165. 
Bought  the  adjoining  lot  from  Henry  White  giving  a  30-day  note 
in  payment  $500. 

1 7.  Paid  cash  for  salaries  $600. 

18.  Paid  cash  for  salesman's  traveling  expenses  $50. 
20.     L.  D.  Watterbury  returned  merchandise  of  $300  because  it  was 

not  needed. 
22.    Bought  merchandise  from  Gray  and  Crosby,  on  account,  $4,000. 


THE  FINANCIAL  STATEMENTS  189 

24.     Sold  merchandise  to  Harley  C.  Gibbons  for  cash  $3,000. 
26.     Paid  cash  for  miscellaneous  expense  $125. 
28.     Donated  $25  to  the  United  Charities. 

30.     Bought  an  adding  machine  from  the  Burroughs  Adding  Machine 
Company,  on  account,  $250. 

(b)  Enter  totals  and  differences  in  small  pencil  figures,  after  which 
prepare  a  trial  balance. 

(c)  On  April  30  there  was  merchandise  unsold  of  $5,765.  The  follow- 
ing expense  assets  were  consumed  in  operating  the  business:  taxes  $20; 
office  supplies  $65;  salaries  $600;  salesman's  traveling  expenses  $50;  mis- 
cellaneous expense  $125;  donations  $25. 

(d)  From  the  trial  balance  and  inventory  prepare: 

1.  Balance  sheet 

2.  Statement  of  profit  and  loss 

(e)  Close  the  ledger  and  prepare  a  post-closing  trial  balance. 

12.  (a)  Record  the  following  transactions  in  the  ledger.  Two  sheets 
of  ledger  paper  are  required.  Number  the  pages  1,  2,  3,  4.  Arrange  the 
accounts  in  the  proper  order  and  give  each  account  the  specified  number  of 
lines:  Cash  12,  Chester  R.  Tappan  5,  Carl  Friedman  3,  Walter  S.  Scott  3, 
Merchandise  Inventory  4,  Merchandise  Purchases  3,  Merchandise  Sales  7, 
Furniture  and  Fixtures  6,  Delivery  Equipment  3,  Securities  3,  Rent  3, 
Taxes  6,  Expense  8,  M.  S.  Grant  3,  Notes  Payable  3,  Lewis  L.  Krammer, 
Capital  7,  Merchandise  Trading  8,  Profit  and  Loss  7,  Lewis  L.  Krammer, 
Drawing  5. 

April,  19 — 

1.  Lewis  L.  Krammer  started  business  with  cash  of  $2,000;  Mer- 

chandise $3,500;  furniture  and  fixtures  $800. 

2.  Paid  cash  for  rent  for  April  $100. 

3.  Sold  merchandise  to  Chester  R.  Tappan,  on  account,  $950. 

5.  Sold  merchandise  to  Carl  Friedman,  on  account,  $1,100. 

6.  Bought  five  $50  Liberty  bonds  at  $47.50  each  and  paid  for  them 

in  cash. 

7.  Withdrew  cash  for  personal  use  $45. 

8.  Bought  a  new  cash  register  from  the  National  Cash  Register  Com 

pany  for  $110  cash. 
10.    Bought  a  horse  and  wagon  from  M.  S.  Grant,  on  account,  $450. 
12.    Paid  cash  for  taxes  to  April  of  next  year,  $48. 
14.     Sold  merchandise  to  Walter  S.  Scott  for  cash  $1,200. 


190  FUNDAMENTALS  OF  ACCOUNTING 

16.     Bought  merchandise  from  E.  H.  Stutie  and  Company  for  $4,000, 
giving  a  30-day  note  in  payment. 

18.     Received  check  from  Chester  R.  Tappan  paying  invoice  of  April 

3.  SQ50. 
20.     Paid  cash  for  clerks'  salaries  $425. 
22.     Bought  office  supplies  from  L.  C.  Hayes  for  $85  cash. 
25.     Paid  cash  for  shipping  supplies  $15. 

30.     Sold  merchandise  to  Chester  R.  Tappan,  on  account,  $1,500. 
Paid  cash  for  personal  coal  bill  $64. 

(b)  Enter  totals  and  differences  in  small  pencil  figures,  after  which 
prepare  a  trial  balance. 

(c)  Merchandise  inventory  on  April  30  was  $4,013.    All  expense  assets 
were  consumed  in  operating  the  business  except  $44  of  taxes. 

(d)  Prepare: 

1.  Balance  sheet 

2.  Statement  of  profit  and  loss 

(e)  Close  the  ledger  and  prepare  a  post-closing  trial  balance. 


CHAPTER  XIII 
THE   JOURNAL 

Purpose  of  Chapter. — 

i.  The  function,  form,  and  use  of  the  journal. 

2.  Posting  to  the  ledger. 

3.  Correction  of  errors. 

How  the  Ledger  Records  a  Transaction. — The  ledger  is  valu- 
able in  that  it  sorts  out  and  Collects  under  suitable  account  titles 
all  information  which  concerns  each  asset,  liability,  or  capital 
item  and  shows  the  net  effect  of  increases  and  decreases  in  each. 
This  information  is  necessary  in  showing  financial  condition,  but 
it  does  not  serve  all  purposes. 

Almost  every  transaction  recorded  in  the  books  affects 
more  than  one  account.  Thus  the  purchase  of  merchandise  for 
cash  affects  Merchandise  Purchases,  and  Cash.  Any  one  ac- 
count, therefore,  records  only  the  part  of  the  transaction  af- 
fecting that  particular  account.  The  Cash  account  records  the 
parts  of  many  transactions  which  have  increased  or  decreased 
cash,  but  the  complete  record  of  no  transaction  is  found  in  the 
Cash  account — only  a  partial  record.  We  must  look  in  other 
accounts  for  the  rest  of  the  record,  and  it  may  be  widely  scattered 
in  different  parts  of  the  ledger — an  inconvenient  and  unsatisfac- 
tory arrangement. 

The  Need  for  a  Journal. — A  business  transaction  is  a  unit,  a 
complete  happening,  for  which  it  is  necessary  to  have  available 
all  the  information.  It  does  not  suffice  to  know  that  on  March 
30  we  sold  $100  worth  of  merchandise;  we  need  to  know  the  cus- 
tomers to  whom  it  was  sold.    To  know  what  else  happened  on 

191 


192  FUNDAMENTALS  OF  ACCOUNTING 

the  30th,  every  account  in  the  ledger  would  have  to  be  inspected, 
since  it  does  not  record  in  any  one  place  or  account  all  of  the 
transactions  occurring  on  a  given  date.  It  is  very  convenient  to 
have:  (1)  in  one  place  the  full  record  of  each  transaction,  and  (2) 
a  record  of  all  transactions  occurring  on  a  given  date  in  the  order 
of  their  occurrence.  Since  the  ledger  does  not  give  this  in  con- 
venient form,  it  is  necessary  to  provide  another  record  known  as  a 
"journal."  This  will  record  all  transactions  just  as  they  occur — 
one  after  the  other  in  order  of  time,  and  is  a  chronological  record, 
a  history  or  diary  of  the  changes  in  the  assets,  liabilities,  and 
capital  of  a  particular  enterprise. 

What  to  Record  in  the  Journal. — The  journal  is  not  a  book  in 
which  to  record  happenings  different  from  and  in  addition  to 
those  in  the  ledger.  It  records  the  same  transactions,  but  in  a 
different  form.  Its  form  is  that  of  a  diary,  whereas  the  ledger  is  a 
sorted  record  in  accordance  with  the  asset,  liability,  and  capital 
titles  affected.  In  your  diary  you  would  record,  in  the  order  of 
date,  those  events  you  considered  as  having  a  bearing  on  your  life 
— as  important  enough  to  record.  Likewise  a  ship's  log  contains 
a  record  of  happenings  which  concern  that  particular  ship.  So, 
too,  the  newspaper  records  the  history  of  the  community,  and  in 
many  places  you  will  find  it  named  The  Journal.  The  minutes  of 
a  society,  fraternal,  or  professional  group  constitute  the  history  of 
that  organization.  Each  records  the  events  that  are  important 
to  its  members. 

Since  the  business  enterprise  is  concerned  with  events  that 
affect  its  financial  condition,  its  journal  will  contain  a  record  of 
changes  in  assets,  liabilities,  and  capital,  because  these  are  the 
facts  that  must  be  entered  in  the  various  accounts  in  the  ledger. 
The  journal  then  is  a  convenient  device  for  gathering  this  informa- 
tion in  chronological  order.  Transactions  are  entered  first,  as 
they  take  place,  in  the  journal.  For  this  reason  it  is  called  a  book 
of  first  or  original  record.  Then  they  are  entered  in  the  ledger. 
Since  all  transactions  are  to  be  transferred  from  the  journal  to  the 


THE  JOURNAL  193 

ledger,  the  journal  is  a  convenient  place  in  which  to  indicate 
what  accounts  in  the  ledger  will  be  affected  by  each  transaction, 
thus  simplifying  their  entry  in  the  ledger. 

Form  and  Arrangement  of  Material. — Any  statement  of  the 
essential  facts  of  transaction  arranged  chronologically  constitutes 
a  diary  or  journal.  This  may  be  simply  a  non-technical  story  or 
financial  history  of  the  business.  Thus  we  may  record  some 
transactions  of  Martin  Kellogg's  rug  and  carpet  business  as 
follows : 

January  2,  1920.  Martin  Kellogg  began  the  wholesale  rug  and  carpet 
business  at  1279  State  St.,  Chicago,  111.,  investing  $50,000  in  cash. 

January  3.  Bought  for  cash  from  the  Boston  Rug  Company  invoice 
of  domestic  rugs  $17,000. 

January  5.  F.  S.  Scott  of  Newark,  Ohio,  purchased  from  him  rugs 
and  carpets  invoiced  at  $4,000,  on  account,  30  days. 

However,  since  certain  parts  of  this  story,  from  the  standpoint 
of  bookkeeping,  are  more  important  than  others,  years  of  experi- 
ence have  shown  that  the  standard  form  of  arrangement  is  more 
convenient  than  any  other.  For  convenience  the  record  is 
arranged  as  follows: 

1.  The  date,  consisting  of  month,  day,  year.    This  might 

appear  at  the  left,  or  since  a  line  is  usually  skipped  to 
separate  the  transactions,  it  may  be  placed  on  the  line 
above  the  description,  effectually  separating  transac- 
tions. Usually  the  year  and  month  appear  only  at  the 
top  of  the  page. 

2.  Statement  of  the  debits  and  credits  to  be  transferred  to 

the  ledger  record. 

3.  What  was  done,  bought,  sold,  paid,  received,  given, 

returned,  etc.  Usually  the  statement  of  the  trans- 
action will  begin  with  one  of  these  words. 

4.  With  whom  the  transaction  took  place.    The  name  of  the 

individual,  firm,  or  corporation. 
13 


194  FUNDAMENTALS  OF  ACCOUNTING 

5.  Terms:  on  account,  for  cash,  for  note,  etc. 

6.  Description  of  the  things  whose  purchase,  sale,  or  use 

brought  about  changes  in  assets,  liabilities,  or  capital. 
Articles  bought  or  sold,  purpose  for  which  money  was 
received  or  paid,  etc. 
This  or  a  similar  arrangement  makes  for  definiteness.    When 
a  standard  form  is  used,  comparison  of  each  entry  with  this 
standard  form  affords  a  check  on  the  omission  of  any  essential 
element.    The  object  in  writing  the  description  is  to  give  all  data 
necessary  for  a  full  understanding  of  what  occurred,  i.e.,  to  pre- 
sent the  information  so  clearly  that  not  even  anyone  unfamiliar 
with  the  business  can  possibly  mistake  the  meaning  of  the 
transaction. 

Condense,  tabulate,  and  abbreviate  wherever  possible,  but 
never  sacrifice  clearness  for  brevity. 

Indicating  Debits  and  Credits.— Experience  has  shown  that  a 
uniform  method  of  indicating  in  the  journal  the  debits  and  credits 
of  a  transaction  is  advantageous.  They  might  be  written  just 
above  or  below  the  description.  In  the  standard  form  they  are 
written  in  a  position  to  make  easy  the  transfer  of  the  items  to  the 
ledger  accounts  affected.  This  is  just  above  the  description. 
Since  the  content  of  the  transaction  is  well  in  mind  when  it  is 
being  arranged  for  recording,  there  is  no  practical  difficulty  in 
indicating  the  debits  and  credits  first — in  fact,  it  really  aids  in 
arranging  the  description. 

How  shall  the  debits  and  credits  be  indicated?  The  form 
is  not  all-important,  but  an  arrangement  in  the  most  convenient 
order  for  transfer  to  the  ledger  accounts  is  advisable.  Since  the 
ledger  shows  debits  on  the  left  and  credits  on  the  right,  that  order 
will  be  followed  in  the  journal.  Since  the  names  of  the  accounts 
debited  and  credited  in  each  transaction  are  different,  the  amount 
of  every  debit  and  credit,  as  well  as  the  name  of  the  account 
affected,  must  be  stated.  This  has  led  to  the  standard  form  of 
journal  shown  in  Form  6  (a). 


THE  JOURNAL 


195 


Explanation.  The  debit  position  is  as  far  to  the  left  as  it  can 
be  written  in  the  wide  column.  The  credit  position  may  be  any 
distance  to  the  right  and  one  l'ne  lower  than  the  debit  position. 
The  description  is  arranged  in  the  form  of  a  paragraph.  We  have 
indented  the  first  line  the  same  as  the  beginning  of  the  credit 
position. 

The  other  lines  of  the  description  extend  all  the  way  across 
the  wide  column  from  the  rule  at  the  left  to  the  folio  column  at 
the  right. 

The  unit-ruled  money  columns  assist  greatly  in  preventing 
errors  in  entering  the  amounts  of  money  opposite  the  accounts 
debited  and  credited.     See  the  journal  on  page  197. 


City  and  Date 


Debit  Amount 
Dollars  Cents 


Credit  Amount 
Dollars  Cents 


Debit  position 

Credit  position 

Description   of  the  trans- 
action 

Date 


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Form  6.  (a)  Standard  Form  of  Journal  with  Date  Above  the  Debit  and  Credit 

Position 


Other  forms  of  the  journal  in  general  use  are  shown  in  Forms 
6  (b),  and  6  (c).  Form  6  (b)  is  the  same  as  Form  6  (a)  except 
that  the  date  is  placed  at  the  left  of  each  transaction  instead  of 
above  it  and  in  the  center  of  the  page. 


196 


FUNDAMENTALS  OF  ACCOUNTING 


City,  Month,  Year 


Debit         Credit 
Amount      Amount 


Year 
Month 


Debit  position 

Credit  position 

Description  of  the  transaction. 


Form  6.  (b)  Standard  Form  of  Journal  with  Date  Column  to  Left 


City  and  Date 


Debit         Credit 

Amount      Amount 


Debit  position 

Credit  position 

Description  of  the  transaction. 

Date 


Form  6.  (c)  Standard  Form  of  Journal  with  Folio  Column  to  Left  of  the  Debit 
and  Credit  Position 


THE  JOURNAL 


197 


Form  6  (c)  is  the  same  as  Form  6  (a)  except  that  the  folio 
column  is  at  the  left  instead  of  at  the  right  of  the  debit  and 
credit  position.  The  advantage  of  having  this  column  at  the 
right  is  that  the  amount  of  money  transferred  to  the  ledger  is  more 
easily  verified. 

The  Journal  Record  Illustrated. — We  shall  now  show  the 
operation  of  the  journal  by  recording  the  transactions  of  Martin 
Kellogg.     In  the  first  entry  in  the  journal  the  description  often 


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FUNDAMENTALS  OF  ACCOUNTING 


covers  several  pages,  making  it  more  convenient  to  set  forth  all 
the  facts  first  and  then  indicate  the  debits  and  credits. 

If  there  is  not  sufficient  space  at  the  end  of  a  page  to  record 
all  the  data  for  a  given  transaction,  it  is  considered  better  prac- 
tice to  record  all  of  the  transaction  in  question  on  the  next  page. 
The  unused  lines  on  the  previous  page  may  be  canceled  by  ruling 
one  or  more  lines  across  them. 

Tabulating  in  the  Journal. — If  several  items  appear  in  the 
explanation  of  one  journal  entry,  they  are  usually  arranged  in 
tabulated  form.  Assume  that  the  items  making  up  the  in- 
voice of  goods  sold  to  F.  S.  Scott  were  entered  in  full  in  the 
journal.  Each  item  then  begins  a  new  paragraph  as  indicated 
below : 


F.  S.  Scott 

Merchandise  Sales 

Sold  to  F.  S.  Scott,  n/30: 

10  Oriental  Rugs  @  $108-     $1,080 

20  Royal  Wilton  9  X    1 2  @ 

$97-  1,940 

490  yd.  Axminster  Carpet  @ 

$2  980 


4000 


4000 


Total 


1 
Reading  the  Journal. — It  is  customary  in  reading  a  journal 

entry  to  name  the  debit  first  and  to  insert  the  word  "to"  before 

naming  the  credit.     If  there  is  only  one  debit  and  one  credit,  it  is 

customary  to  name  the  amount  only  once,  after  the  credit.     But 

if  the  entry  consists  of  several  debits  and  one  or  more  credits,  or 

vice  versa,  it  is,  of  course,  necessary  to  give  the  name  and  amount 

of  every  debit  and  every  credit.     Many  accountants  write  the 

word  "to"  before  the  first  credit  item  in  every  journal  entry, 

although  this  is  not  considered  necessary.     The  following  journal 

entries  will  illustrate  the  foregoing: 


THE  JOURNAL  199 

March  10,  19 — 

Merchandise  Purchases $3,000  - 

Cash $3,000  - 

or 

Merchandise  Purchases $3,000  - 

To  Cash $3,000  - 


and 


March  21,  19 — 


Cash $4,000  - 

Merchandise  Inventory 6,000  - 

Furniture  and  Fixtures 1,000  - 

Notes  Payable $3,000  - 

John  Davis,  Capital 8,000  - 

The  second  entry  is  read,  March  21,  19 — ,  Cash  $4,000;  Mer- 
chandise Inventory  $6,000;  Furniture  and  Fixtures  $1,000,  to 
Notes  Payable  $3,000;  John  Davis,  Capital  $8,000. 

Posting. — The  first  record  of  all  transactions  is  made  in  the 
journal,  as  illustrated  on  page  197.  After  this,  each  debit  and 
credit  must  be  transferred  to  the  ledger  and  sorted  and  collected 
by  being  recorded  under  its  particular  account  title.  This  is  a 
purely  mechanical  operation  and  consists  merely  in  transferring 
from  the  journal  to  the  proper  accounts  in  the  ledger  the  amounts 
placed  opposite  the  accounts  debited  and  credited  in  the  journal. 
To  illustrate  the  posting  process  we  shall  post  from  Martin  Kel- 
logg's  journal  to  his  ledger.  Assume  that  the  ledger  accounts 
appear  on  the  following  pages:  Cash  on  page  1;  F.  S.  Scott,  2; 
Philadelphia  Carpet  Company,  3;  Martin  Kellogg,  Capital,  4; 
Merchandise  Purchases,  5;  Merchandise  Sales,  6.  In  posting 
place  the  journal  to  the  left  of  the  ledger  on  the  desk,  because 
almost  all  the  writing  will  be  done  in  the  ledger.  After  transfer- 
ring the  journal  record  to  the  ledger,  Kellogg's  ledger  will  appear 
as  follows : 


20O  FUNDAMENTALS  OP  ACCOUNTING 


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In  studying  the  process  of  posting,  trace  all  the  items  from  the 
journal  to  the  ledger  according  to  the  following  procedure. 

The  first  account  affected  appears  in  the  journal  as  a  debit  to 
Cash  for  $50,000.     The  successive  steps  in  posting  are : 

1.  Turn  to  the  Cash  account  on  page  1  in  the  ledger. 

2.  The  amount  of  $50,000  is  entered  in  the  debit  money  column. 


THE  JOURNAL  201 

3.  The  figure  1  is  entered  in  the  folio  column  just  to  the  left  of  the 
money  column,  indicating  the  page  of  the  journal  from  which  this  item 
came. 

4.  The  letter  "J,"  the  initial  of  the  book  in  which  this  item  appears, 
is  written  to  the  left  of  the  folio  column.  It  is  not  placed  in  the  folio 
column,  because  the  journal  page  number  frequently  runs  into  three  figures 
and  fills  the  column. 

5.  The  figure  "  2  "  is  placed  in  the  day-of-the-month  column. 

6.  The  month  "Jan. "  is  written  in  the  month  column. 

7.  The  year  "  19 — "  is  written  just  above  the  month. 

This  completes  the  record  in  the  ledger.  The  explanation 
column  may  be  used  for  additional  information,  but  this  is  not 
essential  because  the  full  facts  may  be  obtained  from  page  1  of  the 
journal. 

A  final  step  is  now  necessary.  Turn  to  the  journal  and 
observe  that  the  figure  1  has  been  placed  in  the  folio  column  to 
the  right  of  Cash  and  just  to  the  left  of  the  $50,000  in  the  debit 
money  column.  This  indicates  that  the  item  has  been  trans- 
ferred to  the  Cash  account  in  the  ledger.  The  initial  of  the 
ledger  "L,"  is  sometimes  used  but  is  not  necessary  because  all 
debits  and  credits  are  transferred  to  the  ledger.  The  initial  of 
the  book  of  original  entry  should  be  placed  in  the  ledger,  however, 
because  several  different  kinds  of  journals  are  generally  in  use  in 
business,  and  the  initial  indicates  the  particular  journal  from 
which  the  item  came,  as  S  for  sales  journal,  P  for  purchase 
journal,  etc.,  as  the  student  will  see  later. 

In  the  second  account  affected,  that  of  Martin  Kellogg, 
Capital,  the  procedure  is  as  follows: 

1.  Turn  to  the  Martin  Kellogg,  Capital  account  on  page  4  in  the  ledger 
and  observe  that: 

2.  The  amount  of  $50,000  is  entered  in  the  credit  money  column. 

3.  The  figure  1  is  entered  in  the  folio  column. 

4.  The  letter  "  J  "  to  the  left  of  the  folio. 

5.  The  day  "  2  "  in  the  day-of-the-month  column. 

6.  The  word  "Jan."  in  the  month  column. 

7.  The  year  "  19 — "  above  the  month. 


202  FUNDAMENTALS  OF  ACCOUNTING 

This  completes  the  record  in  the  ledger.  The  next  and  last 
step  is  to  turn  to  the  journal  and  observe  that  the  figure  4  has 
been  placed  in  the  folio  column  in  the  journal  to  the  right  of  the 
credit  item,  Martin  Kellogg,  Capital  and  just  to  the  left  of  the 
$50,000  in  the  credit  money  column. 

In  like  manner  trace  all  the  other  debits  and  credits  from  the 
journal  to  the  ledger,  and  you  will  understand  the  purpose  and 
procedure  of  posting.  Practice  on  the  assignments  will  enable 
you  to  post  accurately  and  rapidly.  Strive  for  accuracy  first,  as 
speed  without  accuracy  in  posting  is  worthless. 

Post  Marking. — Entering  a  mark  of  some  kind — the  ledger 
page  number  as  explained  above — in  the  folio  column  in  the 
journal  opposite  the  debit  or  credit,  to  indicate  that  the  item  has 
been  transferred  to  the  ledger,  is  called  post  marking.  The  marks 
most  generally  used  are  the  figure  indicating  the  ledger  page 
and  the  check  mark  (v).  The  ledger  page  number  is  to  be  pre- 
ferred because  it  affords  convenient  reference  without  using  the 
ledger  index.  Sometimes  both  the  ledger  page  number  and  the 
check  mark  (y)  are  used.  This  is  the  case  when  the  bookkeeper 
or  his  assistant  first  enters  in  the  journal  the  ledger  page  opposite 
every  debit  and  credit  so  that  the  ledger  page  can  be  found 
quickly  when  posting  takes  place.  As  each  item  is  posted,  a 
check  mark  (vO  is  placed  in  the  folio  column  in  the  journal.  If 
the  check  mark  (V)  or  some  other  mark  were  not  used,  the  one 
doing  the  posting  would  have  difficulty  in  finding  the  place  where 
he  stopped  if  interrupted  in  his  work.  Also,  care  in  marking 
just  after  posting  prevents  errors.  All  unmarked  items  should  be 
investigated  immediately. 

Making  Corrections.— It  goes  without  saying  that  errors 
should  not  occur,  but  since  they  will  occur,  it  is  well  to  know  how 
to  correct  them.  In  general,  no  erasures  should  be  made  in  the 
journal  or  other  book  of  original  entry,  because  they  may  prevent 
the  book  from  being  used  as  evidence  in  court  actions.     They  also 


THE  JOURNAL  203 

raise  a  doubt  as  to  the  ability  of  the  worker  and  sometimes  as  to 
his  honesty. 

If  a  transaction  has  been  omitted,  all  that  is  necessary  is  to 
enter  it  in  the  journal  under  the  last  transaction  recorded,  giving 
its  proper  date,  and  then  to  post  it  to  the  ledger.  In  posting, 
the  correct  date  of  the  item  may  be  entered  in  the  account  in  the 
ledger  or  it  may  be  posted  as  of  the  date  of  record  and  the  correct 
date  placed  in  the  explanation  column.  This  will  call  attention 
to  the  fact  that  the  item  is  irregular. 

If  an  error  has  been  made  in  a  journal  entry  in  entering  the 
name  of  an  account  or  an  amount  of  money,  correction  can  be 
made  by  drawing  a  line  through  the  incorrect  item  and  writing 
the  correct  item  just  above  it. 

If  an  error  is  discovered  after  the  ledger  has  been  closed,  a 
correcting  journal  entry  will  be  necessary.  If  the  correction 
involves  an  increase  or  decrease  of  capital,  the  proper  credit  or 
debit  should  first  be  made  to  the  Profit  and  Loss  account  and  then 
transferred  to  Capital.  The  reason  for  making  the  adjustment 
through  Profit  and  Loss  is  to  keep  in  one  place  in  the  ledger 
all  changes  in  capital  that  have  occurred  during  the  current 
period. 

Keep  in  mind  that  the  proper  corrections  must  be  made  in  the 
accounts  appearing  in  the  post-closing  trial  balance  as  well  as 
in  the  financial  statements.  If  the  correction  entry  does  not 
involve  change  in  capital,  the  Profit  and  Loss  account  is,  of  course, 
not  used. 

If,  before  closing,  an  item  has  been  posted  to  the  wrong  side 
of  an  account  or  to  the  proper  side  of  the  wrong  account,  merely 
cross  out  the  incorrect  posting  and  post  correctly. 

If  an  item  has  been  posted  twice  to  the  proper  side  of  the  cor- 
rect account,  cross  out  the  second  item  posted. 

Although  other  errors  can  be  made,  these  will  suffice  to  indi- 
cate the  procedure  to  be  followed  in  making  corrections.  An 
illustration  follows,  showing  two  methods  used  for  correcting 
errors : 


204 


FUNDAMENTALS  OF  ACCOUNTING 


February  4,  19—.  William  Simpson  gave  us  his  30-day  note  in  pay- 
ment of  invoice  of  goods  amounting  to  $700. 

This  was  journalized  as  follows : 

February  4,  19 — 

William  Simpson $700  - 

Merchandise  Sales $7°°  ~ 

Sold  William  Simpson  for  his  30-day  note,  invoice  of 

merchandise  $700. 

First  Method.  This  can  be  corrected  by  ruling  a  line  through 
William  Simpson's  name  in  the  journal  and  writing  above  it 
"  Notes  Receivable." 

February  4,  19— 
Notes  Receivable 
William  Simpoon , j^oo  _ 

Merchandise  Sales $«qq  . 

Sold  William  Simpson  for  his  30-day  note,  invoice 
of  merchandise,  $700 


This  is  all  that  is  necessary  if  the  item  has  not  been  posted  to 
Simpson's  account.  However,  if  the  item  has  been  posted,  it 
may  be  corrected  by  crossing  out  the  wrong  item  in  the  journal 
(as  above)  and  in  addition  drawing  a  line  through  the  debit  item 
in  Simpson's  account  in  the  ledger,  as  indicated  below,  and  then 
posting  correctly  to  Notes  Receivable. 


William  Simpson 


97  Main  St.,  Oswego,  N.  Y. 


10— 


Error 


J 


-ys©  - 


Second  Method.     If  the  item  has  been  posted,  the  error  may 
be  corrected  by  making  the  following  journal  entry  and  not 


THE  JOURNAL 


205 


crossing  out  the  incorrect  items  in  the  first  journal  entry  and  the 
account. 


February  7,  19 — 

Notes  Receivable 

William  Simpson 

To  correct  the  error  made  in  the  journal  entry  of 
2/4/ —  on  page  —  in  which  William  Simpson's  account 
was  debited  instead  of  Notes  Receivable. 


$700- 


Posting  the  credit  item  to  Simpson's  account  will  correct  the 
incorrect  debit  item,  canceling  his  account,  which  will  appear  as 
follows : 


William  Simpson 


97  Main  St.,  Oswego,  N.  Y. 


19— 
Feb. 


3 

700 

- 

19— 
Feb. 

7 

Error,  Feb.  4J 


700 


Advantages  of  the  Journal. — The  chief  advantages  of  using 
both  a  journal  and  a  ledger  instead  of  just  a  ledger  may  be 
summed  up  as  follows : 

1.  Shows  in  convenient  chronological  order  the  record  of 

events  affecting  assets,  liabilities,  and  capital. 

2.  Relieves  the  ledger  of  a  mass  of  information,  making  that 

book  merely  a  summary  of  debits  and  credits. 

3.  Affords  an  easy  means  of  reference  to  any  transaction  in 

its  entirety  and  to  all  happenings  on  a  given  date. 

4.  Renders  less  likely  the  error  of  entering  only  a  part  of  the 

debits  and  credits  in  the  ledger,  as  might  occur  were 
one  interrupted  before  completing  the  entry  of  a  trans- 
action. 

5.  Transferring  of  debits  and  credits  from  the  journal  to  the 

ledger  may  be  done  as  time  permits,  or  may  be  assigned 
to  an  assistant. 


206  FUNDAMENTALS  OF  ACCOUNTING 

The  only  disadvantage  is  that  additional  time  is  required  to 
write  the  record  in  one  book  and  then  transfer  part  of  the  informa- 
tion to  another  book.  However,  the  advantages  set  forth  more 
than  outweigh  this  one  disadvantage. 

Questions 

i.  Why  is  a  journal  necessary? 

2.  (a)  What  name  is  given  to  a  personal  journal?  A  ship's  journal? 
The  journal  of  a  community?  The  journal  of  a  professional  or  social 
society? 

(b)  What  will  each  of  the  above  journals  contain? 

3.  What  is  recorded  in  a  business  journal? 

4.  Name  and  explain  five  (5)  items  that  should  appear  in  the  descrip- 
tion of  a  transaction. 

5.  What  is  a  convenient  arrangement  of  the  items  in  Question  4? 

6.  In  writing  the  description  of  a  transaction,  should  clearness  be 
sacrificed  for  brevity?     Why? 

7.  What  is  the  preliminary  statement  or  introduction  in  a  journal? 
What  other  names  are  given  to  it? 

8.  What  is  the  most  convenient  way  to  indicate  debits  and  credits 
in  a  journal?     Why? 

9.  What  is  the  ruling  for  a  standard  form  of  journal?     Illustrate. 

10.  Show  how  the  position  of  the  ledger  folio  column  may  vary  in  the 
standard  journal. 

11.  (a)  Give  as  many  different  forms  of  journal  as  you  can.  Obtain 
some  from  business  men  or  think  them  out  yourself. 

(b)  In  what  respect  are  they  similar? 

12.  Where  should  the  debit  position  begin?     Credit  position? 

13.  Where  would  you  begin  the  first  line  of  the  description?     Why? 

14.  How  is  a  tabulated  description  recorded  in  the  journal?    Illustrate. 

15.  How  should  a  journal  entry  be  read:  (a)  If  it  contains  one  debit 
and  one  credit?     (b)  If  it  contains  several  debits  or  credits? 

16.  Is  it  necessary  to  use  the  word  "to  "before  the  credit  item?     Why? 

17.  Give  five  advantages  in  using  a  journal.  Can  you  give  any  other 
advantages? 

18.  Give  any  disadvantages  arising  from  the  use  of  a  journal. 

19.  (a)  What  is  meant  by  "posting"?     (b)  Give  the  best  procedure. 

20.  Why  is  it  necessary  to  write  the  letter  "J"  in  the  ledger  opposite 
every  item  posted  from  the  journal? 


THE  JOURNAL  207 

21.  Why  is  it  necessary  to  post  mark  items  in  the  journal? 

22.  Is  it  necessary  to  use  the  letter  "L"  in  post  marking  items  in  the 
journal?     Why? 

23.  Why  should  erasures  not  be  made  in  a  book  of  original  entry? 

24.  How  may  an  error  in  the  journal  be  corrected:  (a)  Before  posting? 
(b)  After  posting? 

25.  Indicate  the  procedure  to  be  followed  in  correcting  an  error  dis- 
covered after  closing  the  ledger. 

Problems 

1.  (a)  Rule  each  side  of  a  sheet  of  letter-size  paper  about  8  x  io>2 
inches,  in  the  standard  journal  form.  Turn  the  paper  over  to  the  left,  as 
if  it  were  a  page  in  a  book,  when  preparing  to  rule  the  second  page. 

(b)  Number  the  sheet,  pages  1  and  2.  The  odd  numbered  pages  1,  3,  5, 
etc.,  should  have  the  page  number  in  the  upper  right  corner;  the  even 
numbered  pages  2,  4,  6,  etc.,  should  have  the  page  number  in  the  upper 
left  corner. 

(c)  Record  the  following  transactions  in  the  journal. 

(d)  After  this  journal  has  been  corrected  in  class  or  otherwise,  it  will 
serve  as  the  basis  for  an  assignment  in  posting;  therefore  you  should  keep 
the  paper  in  good  condition.     If  your  journal  is  not  neat,  rewrite  it. 

June,  19 — 

1.  James  Marshall  began  the  wholesale  hay  and  feed  business  at  62 

Seventh  Ave.,  Detroit,  Mich.,  with  a  cash  investment  of 
$15,000. 

2.  Paid  Howard  and  Gibbs  by  check  $400  for  rent  of  premises  for 

June  and  July.     Bought  for  cash  bill  of  hay  and  feed  from  the 

Western  Grain  Company,  14  Division  St.,  Chicago,  111.     Total 

$6,000. 
5.     Sold  for  cash  to  John  Drew  invoice  of  hay  $4,300. 
9.     Sold  20  tons  feed  at  $97.50  per  ton  to  Hiram  McCormick,  90 

Southern  Ave.,  City,  terms  cash  in  10  days. 
12.     Bought  40  tons  feed  at  $75,  30  tons  timothy  hay  at  $32,  10  tons 

alfalfa  at  $30,  from  Union  Grain  Company,  316  La  Fayette  St., 

St.  Louis,  Mo.,  terms  on  account. 
17.     Sold  5  tons  feed  at  $102,  10  tons  alfalfa  at  $40,  to  Central  Hay 

and  Feed  Company,  Jackson,  Mich.,  terms  on  account. 

2.  (a)  Rule  both  sides  of  a  sheet  of  paper  in  journal  form  and  number 
the  pages  1  and  2. 


208  FUNDAMENTALS  OF  ACCOUNTING 

(b)  Journalize  the  following  (keep  this  journal  until  called  for) : 

March,  19 — 

1.  Arthur  Farwell  began  the  wholesale  furniture  business  at  75 
Magnolia  Ave.,  Richmond,  Va.  His  assets  consisted  of  cash 
$9,000;  office  and  store  fixtures  $1,500;  stock  of  furniture 
$40,000;  and  office  supplies  $200. 

5.  Paid  cash  to  Southern  Realty  Company  for  rent  of  store  for  3 

months  from  March  1,  $750. 

16.  Bought  invoice  of  furniture  $7,000  from  Dixie  Furniture  Com- 

pany, Staunton,  Va.,  terms,  $3,000  in  cash  and  his  note  at  45 
days  without  interest  for  the  balance. 

29.  Paid  clerks'  salaries  in  cash  $100. 

April,  19 — 

6.  Sold  invoice  of  furniture  $4,000  to  Robson  and  Bell,  85  Greene 

Ave.,  Atlanta,  Ga.,  for  their  30-day  note  without  interest. 
20.     Sold  $3,000  bill  of  furniture  to  the  Williams  Furniture  Company, 
Knoxville,  Tenn.,  for  cash. 

30.  Paid  cash  $4,000  for  his  45-day  note  of  3/16/ —  favor  of  Dixie 

Furniture  Company. 

3.  (a)  Rule  both  sides  of  a  sheet  of  paper  in  journal  form  and  number 
the  pages  1  and  2. 

(b)  Journalize  the  following  (keep  this  journal  until  called  for) : 

March,  19 — 

1.  Joseph  Fay  began  the  flour  and  grain  business  at  2715  Oak  St., 

Cincinnati,  Ohio,  by  investing  cash  $8,000. 

2.  Bought  from  William  Dempsey  for  cash,  100  bbl.  flour  at  $10  per 

bbl.,  $1,000. 

3.  Bought  from  Frank  Carter,  152  Main  St.,  on  account,  200  bu. 

wheat  at  $2  per  bu.,  $400. 

4.  Paid  rent  of  store  for  March  $150  to  J.  L.  Howe. 

6.    Sold  to  Alexander  Lord,  Circleville,  Ohio,  on  account,  40  bbl. 

flour  at  $13  per  bbl.,  $520. 
10.     Cash  sales  $450. 
15.    Paid  Harry  Smith,  bookkeeper,  salary  of  $20  cash. 

4.  Problem  4  is  a  continuation  of  Joseph  Fay's  business.     Use  the 
same  journal  and  enter  the  following  transactions: 

March,  19 — 

1 7.  Alexander  Lord  returned  5  bbl.  flour  as  unsatisfactory  $65 
19.    Paid  clerk  hire  $25  cash. 


THE  JOURNAL  20Q 

21.     Sold  to  Henry  Miller  for  cash  75  bu.  wheat  at  $2.50  per  bu., 

$187.50. 
23.     Paid  for  repairs  to  store  $10  cash. 
26.     Paid  invoice  of  3d  of  Frank  Carter  in  cash  $400. 

28.  Bought  from  Jacob  Frank,  Dayton,  Ohio,  on  30-day  note,  100  bbl. 

flour  at  $10.35  Per  bbl.,  $1,035.00. 
31.     Proprietor  took  $200  cash  for  private  use. 

5.  (a)  Rule  paper  in  journal  form  and  number  pages  1  and  2. 
(b)  Journalize  the  following  (keep  this  journal  until  called  for) : 

August,  19 — 

1 .  David  Foster  began  the  ribbon  and  lace  business  with  cash  $5 ,000 ; 

owing  to  Thomas  Blake,  on  account,  $150;  due  from  Abraham 
Conklin,  on  account,  $200. 

2.  Paid  rent  of  building  for  August  and  September,  $300  cash  to 

Close  Realty  Company. 
7.     Bought  of  James  Cooper,  on  account,  500  yd.  No.  2  ribbon  at 

10  cents  and  600  yd.  No.  5  lace  at  12  cents. 
10.     Bought  of  Thomas  Blake  1000  yd.  No.  4  ribbon  at  20  cents. 
Paid  cash  $100;  balance  on  his,  Foster's,  30-day  note  without 
interest. 

17.  Sold  to  Herman  Singer,  on  account,  100  yd.  No.  2  ribbon  at  15 

cents. 
20.     Bought  merchandise  for  cash  $3,000. 

29.  Paid  clerks'  salaries  $25  cash. 

30.  Sold  merchandise  for  cash  $1,000. 

31.  Returned  to  James  Cooper  100  yd.  No.  2  ribbon  at  10  cents  as 

not  being  the  color  ordered.     Proprietor  drew  for  personal  use 
merchandise  $10. 

6.  This  is  a  continuation  of  David  Foster's  business.  Use  the  same 
journal  with  another  sheet  numbered  3  and  4  and  enter  the  following 
transactions: 

September,  19 — 

2.    Paid  for  store  fixtures  $50  cash. 

7.  Sold  Henry  Davis,  on  account,  200  yd.  No.  5  lace  at  18  cents. 
9.    Bought  200  2-cent  postage  stamps. 

10.     Paid  note  due  Thomas  Blake  today  $100. 

18.  Received  check  from  Abraham  Conklin  paying  account  open 

August  1,  $200. 
23.    Sold  merchandise  for  cash  $1,500. 


210  FUNDAMENTALS  OF  ACCOUNTING 

25.     Paid  James  Cooper  $50  on  account  of  bill  of  August  7. 
30.     Paid  delivery  boy's  salary  $6  cash. 

7.  (a)  Write  the  following  accounts  on  a  sheet  of  standard  ledger 
paper,  allowing  the  indicated  number  of  lines  for  each  account  (be  sure 
to  arrange  accounts  in  proper  order):  Cash  5,  Rent  3,  Merchandise  Pur- 
chases 3,  Merchandise  Sales  4,  Hiram  McCormick  2,  Union  Grain  Com- 
pany 2,  Central  Hay  and  Feed  Company  2,  James  Marshall,  Capital  3. 

(b)  Post  the  debits  and  credits  from  the  journal  used  in  Problem  1  in 
this  chapter  to  the  accounts  in  this  new  ledger.  Be  sure  that  you  post 
mark  correctly. 

(c)  On  a  separate  sheet  of  journal-ruled  paper  prepare  a  trial  balance 
of  differences  from  your  ledger. 

8.  (a)  On  a  sheet  of  ledger  paper  open  the  necessary  accounts.  One 
sheet  of  ledger  paper  is  required.  Number  the  pages  1  and  2.  Allow  8 
lines  for  Cash  account,  3  lines  for  each  of  the  other  accounts. 

(b)  Post  the  items  from  your  journal  of  Problem  2. 

(c)  Take  a  trial  balance. 

9.  (a)  One  sheet  of  ledger  paper  is  required.  Number  the  pages  1 
and  2.  Open  accounts  allowing  11  lines  for  Cash,  6  for  Merchandise 
Sales,  5  each  for  Merchandise  Purchases  and  Expense,  4  each  for  Alexander 
Lord  and  Joseph  Fay,  Capital,  3  each  for  Frank  Carter  and  Rent. 

(b)  Post  from  your  journal  of  Problem  3  and  take  a  trial  balance. 

10.  This  is  a  continuation  of  Problem  9. 

(a)  Open  an  additional  account  with  Notes  Payable  allowing  3  lines 
for  it  on  the  Problem  9  ledger. 

(b)  Post  from  the  journal  of  Problem  4. 

(c)  Take  a  trial  balance. 

11.  (a)  One  sheet  of  ledger  paper  is  required.  Number  the  pages  1,2. 
Open  accounts  in  the  ledger  and  allow  number  of  lines  as  follows :  Cash 
12;  Merchandise  Purchases  and  Merchandise  Sales  4  each,  Expense  and 
James  Cooper  5  each,  3  each  for  the  other  accounts. 

(b)  Post  from  journal  of  Problem  5. 

(c)  Take  trial  balance. 

12.  This  is  a  continuation  of  Problem  11. 

(a)  Open  additional  accounts  with  Henry  Davis  and  Furniture  and 
Fixtures  on  the  ledger  for  Problem  1 1  and  allow  3  lines  for  each. 

(b)  Post  from  journal  of  Problem  6. 

(c)  Take  a  trial  balance. 


CHAPTER   XIV 
LEDGER   CLOSING  BY   MEANS   OF   THE  JOURNAL 

Purpose  of  Chapter. — 

i .  The  accounting  cycle. 

2.  Adjusting  and  closing  journal  entries. 

3.  Balancing  an  account. 

The  Accounting  Cycle. — The  use  of  a  comparative  balance 
sheet  to  show  assets,  liabilities,  and  capital  at  the  beginning  of  a 
period  and  at  the  end  of  the  period,  and  to  indicate  the  changes 
which  have  taken  place,  has  been  explained  in  Chapter  VII.  It 
has  been  shown  how  the  ledger  collects  all  changes  in  assets, 
liabilities,  and  capital,  from  the  beginning  to  the  end  of  the  period, 
and  how  it  is  necessary  to  clear  every  account  of  all  changes  in 
capital  that  have  occurred  during  the  current  period  by  transfer 
to  the  Capital  account  via  the  Trading  and  Profit  and  Loss 
and  Drawing  accounts,  in  order  to  mark  the  end  of  one  period 
and  prepare  the  ledger  to  perform  its  function  as  a  device  for 
collecting  changes  in  assets,  liabilities,  and  capital  for  the  next 
period. 

In  other  words,  at  the  beginning  of  any  period,  the  accounts 
in  the  ledger  show  the  exact  condition  of  all  the  assets,  liabilities, 
and  capital;  that  is,  the  balance  sheet  and  the  ledger  show 
the  same  financial  condition.  The  ledger,  however,  has  the 
items  arranged  in  convenient  form  to  show  increases  and  de- 
creases. 

The  time  intervening  between  the  beginning  and  ending  dates 
is  the  accounting  cycle,  the  accounting  period,  or  the  fiscal  period, 
and  may  be  of  any  length.     The  usual  practice  is  to  close  the 


212  FUNDAMENTALS  OF  ACCOUNTING 

books  once  each  year.  However,  many  businesses  close  more 
frequently— some  every  6  months;  some  every  4  months;  others 
every  3  months;  and  still  others  every  calendar  month,  with  a 
summary  for  the  1 2  months  comprising  the  year.  If  the  books 
are  closed  December  31  for  the  year,  the  accounting  or  fiscal 
period  is  the  same  as  the  calendar  year.  The  4-week  period  has 
been  adopted  by  many  concerns.  This  has  the  advantage  of 
making  every  one  of  the  13  periods  in  the  year  (52  weeks)  of 
equal  length.  The  usual  summary  of  the  13  periods  would 
give  the  desired  information  for  the  fiscal  or  for  the  calendar 
year. 

Adjustments. — Before  the  fiscal  record  of  one  period  can  be 
closed  all  information  relating  to  that  period  must  be  recorded 
on  the  books.  The  entries  to  record,  at  the  close  of  the  period, 
all  items  not  recorded  in  the  regular  course  of  the  bookkeeping 
routine  are  called  "adjustment"  entries.  These  comprise  such 
items  as  claims  against  others  for  rent,  interest,  etc.,  owed  by 
them  but  not  yet  due  because  the  payment  date  falls  in  the  next 
fiscal  period.  The  portion  belonging  to  the  current  period, 
because  earned  during  this  period,  should  be  recorded  before 
closing  the  books.  So,  also,  items  owed  to  others  for  services 
received  but  not  yet  paid  for  must  be  recorded.  Where  clerks 
are  paid  at  the  end  of  each  week  and  the  fiscal  period  ends  at  the 
middle  of  the  week,  the  salaries  earned  by  them  up  to  that  time 
are  liabilities  which  must  be  recorded,  in  order  to  show  the  total 
amount  of  services  for  the  current  period,  even  though  payment 
for  them  will  not  be  made  till  the  next  period.  These  adjust- 
ment entries  will  be  further  explained  in  Chapter  XV  in  con- 
nection with  accruals. 

After  making  all  adjustment  entries,  the  next  step  is  to  transfer 
increases  and  decreases  in  capital  to  the  Capital  account.  These 
latter  are  really  the  closing  entries,  but  in  many  cases  the  adjust- 
ing and  transferring  entries  together  are  termed  "closing" 
entries,  because  the  adjusting  entries  are  usually  made  at  the 


LEDGER  CLOSING  BY  MEANS  OF  JOURNAL  213 

time  of  closing  the  ledger.  The  advantages  of  chronological 
order  and  full  description  apply  to  all  records  made  on  the  books. 
Therefore,  to  secure  these  advantages,  all  entries,  including 
adjusting  and  closing  entries,  must  first  be  made  in  the  journal. 
It  is  just  as  convenient  to  indicate  the  debits  and  credits  and 
write  the  necessary  descriptions  or  explanations  for  the  adjust- 
ing and  dosing  entries  in  the  journal,  as  it  is  to  record  the 
information  for  other  transactions  in  this  book.  The  journal 
also  enables  one  to  record  them  in  a  comparatively  small  space 
where  they  are  available  for  easy  reference. 

The  Closing  Entries. — Closing  entries,  as  distinguished 
from  adjustment  entries,  consist  merely  in  making  transfers 
of  increases  and  decreases  in  capital  from  the  various  accounts  to 
the  Capital  account  by  way  of  the  Trading  and  the  Profit  and 
Loss  accounts. 

To  illustrate  closing  the  ledger  by  means  of  entries  in  the 
journal,  we  shall  show  the  condition  of  the  business  of  Thomas 
Lipton  after  operating  during  the  month  of  March,  19 — .  The 
trial  balance  shows  the  condition  of  the  ledger  before  closing 
March  31,  19 — .  From  the  trial  balance  and  the  additional 
information,  the  present  financial  condition  of  Lipton's  business 
is  shown  by  its  balance  sheet  and  the  sources  of  changes  in  capital 
are  exhibited  by  means  of  the  statement  of  profit  and  loss.  Fol- 
lowing these  are  given  the  closing  journal  entries  which  indicate 
the  transfers  to  be  made  in  the  ledger.  There  is  next  shown  the 
ledger  after  closing,  containing  all  the  information  found  in  the 
trial  balance,  additional  information,  statement  of  profit  and  loss, 
and  the  balance  sheet. 

It  is  best  to  study  the  balance  sheet  and  statement  of  profit 
and  loss  in  connection  with  the  trial  balance  and  additional 
information  until  the  problem  is  fully  understood,  and  then  to 
trace  the  closing  journal  entries  from  the  journal  to  the  ledger. 
The  entries  are  readily  identified  by  the  numbers  in  parentheses, 
(1)  to  (8)  at  the  left  of  each  entry  and  in  the  explanation  column 


214 


FUNDAMENTALS  OF  ACCOUNTING 


of  each  account  affected  in  the  ledger.  These  parenthetical  num- 
bers are  not  any  part  of  the  bookkeeping  record  but  are  inserted 
to  aid  the  student  in  tracing  the  entries.  Read  carefully  the  expla- 
nation for  each  entry  and  try  to  get  a  good  mental  picture  of  the 
effect  of  the  entry  after  it  has  been  posted.  The  statement  of 
profit  and  loss  is  of  great  assistance  in  understanding  the  closing 
journal  entries,  since  they  carry  out  the  operations  performed  in 
that  statement.  For  example,  the  total  cost  of  merchandise 
available  for  sale,  $13,000,  obtained  in  the  statement  by  adding 
the  purchases  and  the  initial  inventory  is  carried  out  in  the  ledger 
by  means  of  the  following  entries : 

(1)  Merchandise  Trading $4,000  - 

Merchandise  Inventory $4,000  - 

(2)  Merchandise  Trading 9,000  - 

Merchandise  Purchases 9,000  - 

and  the  cost  of  goods  sold,  found  in  the  statement  by  subtracting 
the  final  inventory  from  the  total  cost  of  goods  available  for  sale,  is 
effected  in  the  ledger  through  the  journal  entry : 

(3)  Merchandise  Inventory $2,000  - 

Merchandise  Trading $2,000  - 

Thomas  Lipton,  Trial  Balance,  March  31,  19 — 


Cash 

Adna  Weber 

Merchandise  Inventory  . . 
Furniture  and  Fixtures  . . 

Peter  Peterson 

Thomas  Lipton,  Capital  . 
Thomas  Lipton,  Drawing . 
Merchandise  Purchases . . 

Merchandise  Sales 

Expense 

Rent 

Salaries 


2,100 

300 

4,000 

1,000 


100 
9,000 

300 
400 
160 

$17,360 


1,000 
2,360 


14,000 


$17,360 


LEDGER  CLOSING  BY  MEANS  OF  JOURNAL  215 

Additional  information  obtained  from  various  sources  on 
March  31,  19 — 

Merchandise  inventory $2,000  - 

Expense  inventory 100  - 

Rent  inventory 200  - 

Furniture  and  fixtures  depreciated 2% 

Do  not  commit  to  memory  the  explanation  for  the  journal 
entries.  Learn  to  write  the  proper  explanation  by  understanding 
the  effect  of  each  entry.  Notice  that  every  explanation  states 
what  was  done,  and  why. 


Thomas  Lipton 
Balance  Sheet 
March  31,  19 — 

Assets: 

Cash 

Accounts  Receivable 

Merchandise  Inventory  3/31/- 

Expense  Unconsumed 

Rent  Prepaid 

Furniture  and  Fixtures 

Total 

Liabilities: 
Accounts  Payable 

Total 

Capital: 
Original  Investment . 

Net  Profit $2,420 

Less:  Withdrawal 100 

Net  Increase  in  Investment 

Total 


$2,100 
300 
2,000 
100 
200 
980 


$1,000 


$2,360 


2,320 


$5,680 


1,000 


$4,680 


216 


FUNDAMENTALS  OF  ACCOUNTING 


Thomas  Lipton 

Statement  of  Profit  and  Loss 

From  March  i  to  31,  19 — 


Sales 

Cost  of  Goods  Sold: 

Purchases 

Add  Inventory  3/1/-. 


Total  cost  of  merchandise. 
Less:  Inventory  3/31/- 


Cost  of  goods  sold 

Gross  Profit  on  Sales 

Operating  Expenses: 

Expense 

Rent 

Salaries 

Furniture  and  Fixtures  Depreciation 

Total 

Net  Profit 


$  9,000 
4,000 


$14,000 


113,000 
2,000 


200 

200 

160 

20 


1 1 ,000 


$  3,000 


580 
$  2,420 


Closing  Journal  Entries 
March  31,  19 — 


(Page  18) 


(1) 


(2) 


Merchandise  Trading 

Merchandise  Inventory 

To  transfer  the  amount  of  goods  on 
hand  (Merchandise  Inventory)  March 
1,  19 — ,  to  Trading  account  to  find  the 
total  cost  of  goods  available  for  sale. 

Merchandise  Trading 

Merchandise  Purchases 

To  transfer  the  amount  of  goods 
purchased  during  the  month  to  Trading 
account  to  find  the  total  cost  of  goods 
available  for  sale. 


4,000 


9,000 


4,000 


9,000 


LEDGER  CLOSING  BY  MEANS  OF  JOURNAL 


217 


Merchandise  Inventory 

Merchandise  Trading 

To  deduct  the  present  inventory 
(cost  of  goods  unsold)  from  the  total 
cost  of  goods  to  find  the  cost  of  goods 
sold  and  to  show  the  amount  of  goods 
unsold  (final  inventory). 

Merchandise  Sales 

Merchandise  Trading 

To  transfer  the  amount  of  sales  to 
Trading  account  to  find  the  gross  profit 
on  sales. 

Merchandise  Trading 

Profit  and  Loss 

To  transfer  the  gross  profit  on  sales 
to  the  Profit  and  Loss  account. 

Profit  and  Loss 

Expense 

Rent 

Salaries 

Furniture  and  Fixtures 

To  transfer  from  the  above  ac 
counts  to  Profit  and  Loss  account  the 
amount  of  the  several  items  consumed 
in  operating  the  business,  for  the  pur 
pose  of  finding  the  net  increase  in  capital 
(net  profit). 

Profit  and  Loss 

Thomas  Lipton,  Drawing 
To  transfer  the  net  profit  to  the 
Drawing  account  to  find  the  profit  re- 
maining in  the  business. 

Thomas  Lipton,  Drawing 

Thomas  Lipton,  Capital 

To  transfer  the  net  increase  in  capi- 
tal to  the  Capital  account  to  find  the 
present  invested  capital. 


2,000 


14,000 


3,000 


580 


2,420 


2,320 


2,000 


(Page  19) 
14,000  - 


3,000 


200 

200 

160 

20 


(Page  20) 
2,420  - 


2,320 


2Ii 


FUNDAMENTALS  OF  ACCOUNTING 


Balancing  an   Account.— The   proprietor's   capital   account 
might  be  closed  by  making  a  journal  entry  as  below : 


Thomas  Lipton,  Capital  (old) 

Thomas  Lipton,  Capital  (new) 


t,68o  - 


t,68o  - 


After  posting  the  debit  item  the  old  account  would  be  totaled 
and  ruled  off,  and  then  the  credit  item  would  be  posted.  This 
would  carry  out  the  scheme  of  writing  journal  entries  for  every 
item  in  the  ledger,  and  could  be  applied  to  every  other  account 
having  an  excess  on  the  debit  or  credit  side — such  as  Cash,  Notes 
Receivable,  Notes  Payable,  Real  Estate,  Mortgage  Payable,  etc. 
In  practice  this  is  not  necessary,  because  all  the  facts  in  regard 
to  the  account  remain  in  the  account — are  not  transferred  to  some 
other  account.  Therefore  the  date,  the  word  "balance,"  and 
the  amount  of  the  excess  of  the  larger  over  the  smaller  side,  are 
entered  directly  on  the  smaller  side  of  the  account  without  mak- 
ing a  journal  entry.  The  account  is  then  totaled,  ruled  off,  and 
the  same  information  entered  below  the  ruling  on  the  larger  side 
to  indicate  the  present  condition  of  the  account.  This  is  called 
balancing  an  account.  Even  this  balancing  is  often  omitted, 
because  the  difference  between  the  debits  and  credits  indicates 
an  asset,  if  the  debit  side  is  larger,  and  a  liability,  or  capital,  if  the 
credit  side  is  larger,  and  may  be  shown  in  pencil  figures  just  as  is 
done  before  taking  a  trial  balance.  Usually  the  accounts  affect- 
ing Trading  and  Profit  and  Loss  are  the  only  ones  balanced. 


Cash 


(Page  i) 


iQ— 

Mar. 

i 

to 

3i 

10— 

Mar. 

1 

to 

.3' 

2,100 

Adna  Weber 
300 


LEDGER  CLOSING  BY  MEANS  OF  JOURN 
Merchandise  Inventory 


AL 


219 

(Page  1) 


10— 

IQ— 

Mar. 

1 

J 
Trading  (3)  J 

18 

4,000 

- 

Mar. 

31 

Trading  (1)  J 

18 

4,000 

- 

Mar. 

31 

2,000 

- 

Furniture  and  Fixtures 

(Page  1) 

19— 

19— 

Mar. 

1 

J 

1,000 

- 

Mar. 

31 

P.  &  L.  (6)  J 

19 

20 

- 

• 

Peter  Peterson 

19— 

Mar. 

1 
to 

31 

J 

1,000 

Thomas  Lipton,  Capital 

(Page  2) 

10— 

19— 

Mar. 

31 

Balance 

4,680 

- 

Mar. 

1 

J 

2,360 

- 

= 

= 

31 

D/a        (8)  J 
Balance 

20 

2,320 

- 

4,680 

- 

4,680 

- 

Mar. 

31 

4,680 

- 

Thomas  '. 

Lipton,  Drawing 

IQ— 

19— 

Mar. 

1 

J 

100 

- 

Mar. 

3i 

P.  &  L.  (7)  J 

20 

2,420 

- 

31 

C/a        (8)  J 

20 

2,320 

- 

5 

= 

2,420 

2,420 

- 

Prof 

IT 

A.ND  Los 

(Page 

2) 

19  — 

19— 

Mar. 

31 
31 
31 
3i 

3  J 

Expense(6)  J 
Rent  .    (6)  J 
Salaries  (6)  J 
Furn.  &   Fix. 

(6)  J 
Draw      a/c 

(Net  Profit) 

(7)  J 

ICJ 

10 
IQ 

19 

20 

200 
200 
160 

20 
2,420 

- 

Mar. 

3' 

Sales       (5)  J 

10 

3,000 

3,000 

3,000 

- 

220 


FUNDAMENTALS  OF  ACCOUNTING 


Merchandise  Trading 


(Page  2) 


19— 
Mar 


19— 
Mar 


31 


31 


19— 

Mar. 


19— 
Mar 


31 


19— 
Mar. 


19— 
Mar. 


19— 
Mar. 


Invty.    (i)J 
Pur.       (2)  J 


Cost    of 

Goods  Sold 

P.&L.  (5)  J 


to  31  J 


Trading  (4)  J 


to  31  J 


to  31  J 


to  31  J 


19 


19 


4,000 
9,000 


13,000 


11,000 
3,000 


14,000 


19— 
Mar. 


Mar. 


31 


Invty.    (3)  J 

Cost    of 

Goods  Sold 


Sales      (4)  J 


Merchandise  Purchases 


9,000 


19— 
Mar. 


31 


Trading  (2)  J 


Merchandise  Sales 
to  31 


14,000 


19— 
Mar. 


Expense 


300 


Mar 


Rent 


iQ  — 
400  -    Mar. 

Salaries 


160 


iQ— 
Mar. 


31 


3i 


31 


P.&L.  (6)  J 


P.  &  L.  (6)  J 


P.  &  L.  (6)  J 


19 


2,000  - 

11,000  - 
13,000  - 

14,000  - 

14,000  - 
(Page  3) 

9.000  - 
14,000  - 


IQ 


K) 


IQ 


160 


LEDGER  CLOSING  BY  MEANS  OF  JOURNAL  221 

Post-Closing  Trial  Balance,  March  31,  19 — 


Cash 

Adna  Weber 

Merchandise  Inventory . 
Furniture  and  Fixtures . 

Peter  Peterson 

Thomas  Lipton,  Capital 

Expense 

Rent 


52,100 
300 

2,000 
980 


100 

200 


$5,680 


$1,000 
4,680 


$5,680 


Questions 

1.  If  two  balance  sheets  are  prepared  for  a  business  enterprise,  one 
at  the  beginning  and  the  other  at  the  end  of  a  definite  period  of  time,  what 
information  will  be  furnished? 

2.  What  function  does  the  ledger  perform? 

3.  What  transfers  must  be  made  in  the  ledger  to  enable  it  to  perform 
this  function  properly? 

4.  Through  what  accounts  are  these  transfers  made? 

5.  (a)  What  is  "an  accounting  cycle"? 
(b)  What  is  the  length  of  such  a  cycle? 

6.  (a)  What  is  a  calendar  period? 
(b)  What  is  a  fiscal  period? 

7.  What  advantage  is  claimed  for  the  4- week  period? 

8.  (a)  What  are  adjusting  entries? 
(b)  What  are  closing  entries? 

9.  What  are  the  advantages  of  closing  the  ledger  by  means  of  journal 
entries? 

10.  In  what  way  can  the  statement  of  profit  and  loss  be  of  assistance 
in  writing  the  closing  journal  entries? 

11.  What  two  things  should  the  explanation  of  a  closing  journal  entry 
contain? 

12.  Explain  each  of  the  8  closing  journal  entries  made  to  close  Lipton's 
ledger. 

13.  How  may  an  account  be  balanced? 

14.  Why  is  Thomas  Lipton's  Capital  account  balanced? 

15.  How  could  Lipton's  Capital  account  be  balanced  by  journal  entry? 


222 


FUNDAMENTALS  OF  ACCOUNTING 


Problems 

Some  of  the  following  assignments  are  based  on  the  ledgers  and  trial 
balances  you  prepared  in  Chapter  XIII.  In  solving  these  problems  open 
Merchandise  Trading,  and  Profit  and  Loss  accounts  in  the  ledger  you  used 
in  the  Chapter  XIII  work,  and  then  close  the  ledger  by  means  of  journal 
entries.  Use  separate  sheets  of  journal-ruled  paper  for  the  closing  entries 
and  number  the  pages,  beginning  with  the  next  consecutive  number 
following  the  old  journal  used  in  your  solution  for  the  Chapter  XIII 
problems. 

i.  From  the  following  trial  balance  and  additional  information  for 
Problem  7,  Chapter  XIII — 

(a)  Prepare  balance  sheet  as  of  June  24,  19 — . 

(b)  Prepare  statement  of  profit  and  loss  for  24  days. 

(c)  Write  the  closing  journal  entries,  post,  and  close  the  ledger. 

(d)  Prepare  post-closing  trial  balance. 


James  Marshall,  Trial  Balance,  June  24,  19 — 


Cash 

Hiram  McCormick 

Central  Hay  and  Feed  Company 

Union  Grain  Company 

James  Marshall,  Capital 

Merchandise  Purchases 

Merchandise  Sales 

Rent 


$12,900 

1,950 

910 

10,260 
400 


$26,420 


>  4,260 
15,000 

7,160 


126,420 


Assume  that  the  following  additional  information  is  available  for  Pro- 
blem 1,  Chapter  XIII:  June  24,  19 — ,  merchandise  inventory  $4,000;  rent 
prepaid  from  June  24  to  July  31,  $100. 

2.  From  the  following  trial  balance  and  additional  information  for 
Problem  8,  Chapter  XIII— 

(a)  Prepare  balance  sheet  as  of  April  30,  19 — . 

(b)  Prepare  statement  of  profit  and  loss  for  2  months. 

(c)  Write  the  closing  journal  entries,  post,  and  close  the  ledger. 

(d)  Prepare  a  post-closing  trial  balance. 


LEDGER  CLOSING  BY  MEANS  OF  JOURNAL 
Arthur  Farwell,  Trial  Balance,  April  30,  19- 


223 


Cash 

Notes  Receivable 

Merchandise  Inventory . 
Furniture  and  Fixtures . 
Arthur  Farwell,  Capital , 
Merchandise  Purchases . 

Merchandise  Sales 

Office  Supplies 

Expense 

Rent 


5  4,150 
4,000 

40,000 
1,500 

7,000 

200 
100 
75° 


$57,700 


$50,700 
7,000 


$57,7oo 


Additional  information:  April  30, 19 — ,  merchandise  inventory  $44,000; 
rent  prepaid  1  month  $250;  office  supplies  unconsumed  $150;  office  and 
store  fixtures  depreciated  4%. 

3.  From  the  following  trial  balance  and  additional  information  pre- 
pare: 

(a)  Balance  sheet  as  of  March  15,  19 — . 

(b)  Statement  of  profit  and  loss  from  March  1  to  March  15. 

(c)  The  closing  journal  entries. 

George  Whitaker,  Trial  Balance,  March  15,  19 — 


Cash 

J.  C.  Woods 

Frank  Poulter 

George  Whitaker,  Capital . . 
George  Whitaker,  Drawing . 
Merchandise  Purchases .... 

Merchandise  Sales 

Rent 

Expense 


7>i30 
520 


150 
1,400 

150 
20 


$9,370 


$     400 
8,000 


970 


$9,37o 


Additional  information:  merchandise  inventory  $810;  rent  prepaid 
one-half  month  $75;  expense  all  consumed. 


224 


FUNDAMENTALS  OF  ACCOUNTING 


4.  From  the  following  trial  balance  and  additional  information  for 
Problem  10,  Chapter  XIII — 

(a)  Prepare  balance  sheet  as  of  March  3 1 ,  1 9 — . 

(b)  Prepare  statement  of  profit  and  loss  for  the  month  of  March,  19 — . 

(c)  Write  closing  journal  entries,  post,  and  close  the  ledger. 

(d)  Prepare  a  post-closing  trial  balance. 


Joseph  Fay,  Trial  Balance,  March  31,  19- 


Cash 

Alexander  Lord 

Notes  Payable 

Joseph  Fay,  Capital 
Joseph  Fay,  Drawing. . 
Merchandise  Purchases . 

Merchandise  Sales 

Expense 

Rent 


$  6,832 
455 


200 
2,435 


55 
150 


>IO,I27 


50 


50 


$  1,035 
8,000 


1,092 


•  10,127 


50 


5° 


Additional    information:    merchandise    inventory    $1,845;    expense 
inventory  $15;  rent  all  consumed. 

5.  From  the  following  trial  balance  and  additional  information  pre- 
pare: 

(a)  Balance  sheet  as  of  August  31,  19 — . 

(b)  Statement  of  profit  and  loss  for  month  of  August. 

(c)  Closing  journal  entries. 


John  Underwood,  Trial  Balance,  August  31,  19- 


Cash 

Richard  Neel 

L.  C.  Conner 

Notes  Payable 

Thomas  Krinhop 

James  Levison 

John  Underwood,  Capital . . 
John  Underwood,  Drawing. 


$4,575 

- 

200 

- 

15 

$  100 
150 
112 

5,150 

100 

- 

LEDGER  CLOSING  BY  MEANS  OF  JOURNAL  225 

312 


Merchandise  Purchases 
Merchandise  Sales .... 

Rent 

Expense 


300 
25 


^5'527 


►5.527 


Additional  information:  merchandise  inventory  $302;  rent  prepaid  1 
month  $150;  expense  inventory  $10. 

6.  From  the  subjoined  trial  balance  and  additional  information  for 
Problem  12,  Chapter  XIII — 

(a)  Prepare  balance  sheet  as  of  September  30,  19 — . 

(b)  Prepare  statement  of  profit  and  loss  for  September. 

(c)  Write  the  closing  journal  entries,  post,  close  the  ledger. 

(d)  Prepare  the  post-closing  trial  balance. 

David  Foster,  Trial  Balance,  September  30,  19 — 


Cash 

Herman  Singer 

Henry  Davis 

Furniture  and  Fixtures . 

Thomas  Blake 

James  Cooper 

David  Foster,  Capital. . 
David  Foster,  Drawing . 
Merchandise  Purchases . 

Merchandise  Sales 

Rent 

Expense 


$4,065 

15 
36 

50 


10 
3,3i2 


300 
35 


$7,823 


>    150 
62 

5,050 


2,561 


$7,823 


Additional  information:  merchandise  inventory  $978;  expense  items 
and  rent  consumed;  furniture  and  fixtures  depreciated  3%. 


James  C  Hay,  Trial  Balance,  April  30,  19 — 


Cash 

Max  Goldsmith 

Marlowe  and  Brothers 

Fargo,  Smith  and  Company . 


$  8,713 
600 
249 
483 


44 


226 


FUNDAMENTALS  OF  ACCOUNTING 


Merchandise  Inventory . 

Machinery 

Notes  Payable 

Thomas  Morline 

John  Cross 

James  C.  Hay,  Capital . 
James  C.  Hay,  Drawing 
Merchandise  Purchases . 

Merchandise  Sales 

Rent 

Expense 


1,000 

- 

500 

- 

$  1,000 

- 

401 

44 

1,200 

- 

10,400 

- 

200 

- 

1,272 

- 

q66 

- 

75° 

- 

200 

44 

$13,967 

$13,967 

44 

Additional  information:  merchandise  inventory  $800;  rent  prepaid  2 
months  $500;  expense  inventory  $60;  machinery  depreciated  1%. 
From  the  above  trial  balance  and  additional  information  prepare: 

(a)  Balance  sheet  as  of  April  30,  19 — . 

(b)  Statement  of  profit  and  loss  for  April. 

(c)  The  closing  journal  entries. 


8. 


George  Dunn,  Trial  Balance,  May  31,  19- 


Cash 

Jamison  and  Brothers 

Grey  and  Young 

Barrett  and  Company 

Merchandise  Inventory 

Machinery 

Furniture  and  Fixtures 

Thomas  Osterman 

Standard  Machine  Company 

George  Dunn,  Capital 

George  Dunn,  Drawing 

Merchandise  Purchases 

Merchandise  Sales 

Rent 

Expense 


7,252 
249 
483 
963 

1,000 
500 
210 


1,082 

7SO 
240 

$12,729 


64 


64 


$      200 

So 

10,400 

iS° 
1,929 


$12,729 


64 


64 


LEDGER  CLOSING  BY  MEANS  OF  JOURNAL  227 

Additional  information:  merchandise  inventory  $600;  rent  prepaid 
1  month  $250;  expense  consumed  $150;  machinery  depreciated  2%; 
furniture  and  fixtures  depreciated  3%. 

From  the  above  trial  balance  and  the  additional  information  prepare: 

(a)  Balance  sheet  as  of  May  31,  19 — . 

(b)  Statement  of  profit  and  loss  for  April  and  May. 

(c)  Closing  journal  entries. 


CHAPTER  XV 
ACCRUALS 

Purpose  of  Chapter. — 

i.  Nature  of  accrued  liabilities  and  assets. 
2.  Methods  of  recording  them. 

Paying  Wages,  Salaries,  Rent,  and  Interest.— In  many 
business  transactions,  trade  or  business  custom  plays  an  import- 
ant part.  This  is  particularly  true  of  the  matter  of  paying  wages, 
rents,  etc.  In  a  few  cases  the  laborer  is  paid  his  wage  at  the  end 
of  each  day's  work.  More  often,  however,  payment  is  made 
once  a  week — sometimes  upon  completion  of  the  week's  work, 
often  not  until  two  or  three  days  afterward,  the  additional  days 
being  needed  where  large  numbers  of  men  are  employed  to  make 
up  the  pay-roll,  fill  each  man's  envelope  with  the  amount  of  his 
wages,  etc.  Where  irregular  work  periods  involving  overtime 
calculations  occur,  it  is  not  possible  to  know  the  exact  amount 
of  each  workman's  wages  at  the  close  of  the  week.  With  some 
classes  of  employees,  payment  is  made  twice  a  month;  with 
others,  once  a  month;  and  with  others,  the  custom  is  for  them  to 
draw  money  as  needed  against  salary  or  commissions,  with  a 
settlement  of  the  balance  due  once  a  year.  Therefore,  at  the  close 
of  each  day,  unless  payment  is  made  daily,  the  business  owes  the 
workman  or  employee  for  the  services  rendered,  though  in  accord- 
ance with  custom,  this  wage  may  not  be  due. 

In  the  case  of  rent  payments,  custom  also  governs.  In  some 
places  rents  must  be  paid  in  advance;  in  others,  not  until  the  end 
of  the  period  of  occupancy.  In  the  case  of  borrowed  money,  in 
many  instances  the  charge  for  its  use  becomes  due  and  payable  at 

228 


ACCRUALS  229 

the  end  of  the  period  of  use.     In  other  instances  it  must  be  paid 
at  the  beginning  of  the  period. 

Recording  Expense  Purchases. — In  all  cases,  however — 
unless  payment  is  made  before  any  use  or  service  is  received — at 
the  end  of  each  day's  use  the  liabilities  of  the  business  have 
increased  by  the  amount  of  the  unpaid  charges.  It  is  not 
customary  to  record  these  each  day  because  information  about 
them  is  not  needed  daily,  but  it  is  the  almost  universal  practice 
to  make  a  record  only  at  the  time  the  services  are  paid  for.  The 
books  will  then  show  only  the  debit  to  the  particular  expense 
purchase  account  and  the  credit  to  Cash,  the  liability  not  being 
recorded  because  now  settled. 

Accrued  Liabilities. — The  dates  for  paying  such  items  are  a 
result  of  accident,  custom,  or  convenience.  At  the  close  of  a 
fiscal  period  when  it  becomes  necessary  to  determine  accurately 
all  liabilities,  account  must  be  taken  of  both  those  which  have 
and  those  which  have  not  been  recorded.  It  seldom,  or  never, 
happens  that  the  customary  dates  for  paying  these  items  exactly 
coincide  with  the  end  of  the  fiscal  year.  Hence  many  are  unpaid 
and  must,  for  the  sake  of  accurately  stating  all  liabilities,  be  re- 
corded. Liabilities  which  have  been  accumulating  day  by  day, 
which  have  not  been  recorded  on  the  books,  are  called  accrued 
liabilities.  Depending  on  custom,  they  may  or  may  not  be  due. 
Examples  are  amounts  owed  for  wages,  salaries,  taxes,  rent, 
commission,  etc. 

Recording  Accrued  Liabilities. — At  the  time  of  preparing  the 
balance  sheet  and  of  closing  the  ledger,  the  amounts  of  these  items 
that  have  accumulated  must  be  added  to  the  liabilities  if  the 
correct  amount  of  debts  is  to  be  stated.  It  is  understood  that 
the  expense  purchase  in  the  form  of  wages,  salaries,  etc.,  has  been 
received  but  no  record  of  the  fact  has  been  made.  Instead  of 
classing  all  expense  purchases  as  services,  some  speak  of  wages 


230  FUNDAMENTALS  OF  ACCOUNTING 

and  salaries  as  services;  taxes  and  insurance  as  protection:  and 
rent  as  the  right  to  the  use  of  a  building,  money,  or  an  automobile, 
etc.  Rent  of  money  is  referred  to  as  interest)  rent  of  an  auto- 
mobile as  hire  or  fare. 

To  illustrate  how  to  record  accrued  liabilities  the  following 
problem  will  be  solved : 

Problem.  It  is  June  30  and  you  owe  your  clerk,  Tom  Harper,  10 
days'  salary  at  the  rate  of  $30  per  week,  i.e.,  $5  per  day.  It  is  customary 
to  pay  every  2  weeks,  therefore  payment  will  be  made  on  July  4  or  5. 

It  is  evident  that  the  expense  purchase  represented  by  the 
services  performed  by  Tom  Harper  amounts  to  $50,  and  that 
your  liability  to  him  for  services  has  increased  by  the  same 
amount. 

In  general  terms,  the  journal  entry  to  indicate  urtpaid  expense 
purchases  might  read : 

June  30 

Debit  some  account  representing  an  expense  purchase $50  - 

Credit  some  account  representing  a  liability $50  - 

or,  more  specifically, 

June  30 

Salaries $50  - 

Tom  Harper $50  - 

The  debit  correctly  records  an  increase  in  the  expense  pur- 
chases in  Salaries  account.  The  credit  to  Tom  Harper's  account, 
however,  although  correct,  is  not  desirable  because  it  multiplies 
the  number  of  accounts  with  creditors,  and  also  mixes  this  ac- 
count with  the  accounts  of  creditors  from  whom  merchandise 
has  been  purchased. 

A  standard  method  of  recording  accrued  liabilities  will  now  be 
given. 


'     ACCRUALS  231 

Using  tHe  same  problem  as  above,  the  entry  may  be: 

June  30 

(1)  Salaries $50  - 

Accrued  Liabilities $50  - 

To  record  the  accrual  of  10  days'  salary  at  the  rate 
of  $30  per  week  owed  to  Tom  Harper. 

The  account,  Accrued  Liabilities,  is  substituted  for  the  ac- 
count, Tom  Harper,  because  it  is  a  general  term  that  will  serve  as 
a  title  for  all  accrued  liabilities.  It  is  desirable  to  use  it  as  a 
temporary  account  from  which,  to  show  the  cause  of  the  accrual, 
the  credits  are  later  transferred  to  various  accounts,  such  as, 
Salaries,  Rent,  Taxes,  Commission,  Interest,  etc.,  as  explained 
below. 

Referring  to  the  Harper  problem,  assume  that  the  Salaries 
account  has  been  debited  $430  for  services  received  and  paid  for 
before  the  accrual  was  recorded,  then  the  total  in  Salaries  with 
the  accrual  is  $480  which  is  transferred  to  Profit  and  Loss  by  the 
entry:  . 

June  30 

(2)  Profit  and  Loss $480  - 

To  Salaries $480  - 

To  transfer  the  amount  of  expense  consumed 

in  operating  the  business  to  Profit  and  Loss  account,  to 

find  the  net  profit. 

The  third  entry  is  a  matter  of  convenience  only  and  may  be 
made  at  this  time  or  at  the  end  of  the  next  accounting  period. 
It  merely  transfers  the  liability  from  the  accrued  account  to 
Salaries  account  as  referred  to  above.  The  only  advantage  in 
making  the  transfer  at  the  end  of  this  period  is  in  the  use  of  the 
old  date  (for  this  item,  June  30).  This  calls  attention  to  the 
item  and  indicates  that  it  should  be  examined.  The  date,  June 
30,  indicates  that  the  transfer  was  made  during  this  period,  im- 
mediately after  closing  the  ledger. 


232  FUNDAMENTALS  OF  ACCOUNTING 

June  30 

(3)  Accrued  Liabilities $50  - 

Salaries $5°  ~ 

To  transfer  the  liability  of  unpaid  salary  from 
Accrued  Liabilities  account  to  Salaries  account  for 
convenience  in  determining  what  amount  of  the  sub- 
sequent debits  to  this  account  represent  increase  in 
expense  purchases  for  the  new  period,  and  what 
amount  represents  decrease  in  liabilities  previously 
recorded. 

The  next  entry  is  not  part  of  the  closing  entries,  but  is  given 
to  explain  more  fully  the  nature  of  accrued  liabilities. 

Assume  that  on  July  5  you  paid  Tom  Harper  $60  for  salary 
(services)  for  the  two  weeks  ended  July  4.  The  transaction  is 
recorded  as  follows : 

July  s 

(4)  Salaries $60  - 

Cash $60  - 

Paid  Tom  Harper  cash  for  services  as  clerk  for  the 
two  weeks  ended  July  4. 

The  effect  of  the  debit  of  $60  to  Salaries  is  to  decrease  the 
liability  of  $50  recorded  June  30  appearing  on  the  credit  side  of 
Salaries  account,  and  to  increase  the  expense  purchase,  services 
received  from  Tom  Harper  since  June  30,  by  $10. 

Entry  (3)  may  be  omitted  if  entry  number  (4)  for  July  5  is 
made  as  follows : 

July  5 

Accrued  Liabilities $50  - 

Salaries 10  - 

Cash • $60  - 

This  shows  clearly  that  the  payment  of  $60  to  Tom  Harper 
for  services  has  decreased  a  liability  $50;  increased  an  expense 
purchase  (services)  $10,  and  decreased  the  asset,  cash,  $60.  How- 
ever, as  a  matter  of  ease  and  convenience,  the  routine  of  entries 


ACCRUALS  233 

(1),  (2),  (3),  and  (4)  is  almost  invariably  followed.  The  book- 
keeper does  not  then  need  to  stop  to  see  if  some  portion  of  the 
payment  is  in  settlement  of  an  accrued  liability.  It  is  all  re- 
corded in  the  expense  purchase  account  where  the  previous  credit 
automatically  takes  care  of  the  portion  of  the  payment  made  to 
settle  the  liability,  while  the  remainder  shows  the  amount  of  the 
expense  purchase  applicable  to  the  new  period.  The  payment  is, 
therefore,  recorded  in  exactly  the  same  way  as  every  other  pay- 
ment. The  bookkeeping  routine  can  be  followed  without  change 
or  thought,  saving  considerable  time. 

All  the  accrued  liabilities  may  be  recorded  in  the  same  man- 
ner as  salaries.  The  usual  practice  is  to  record  all  the  accrued 
liabilities  in  one  compound  entry,  as  follows : 

Salaries $  50  - 

Wages 70  - 

Taxes 210- 

Accrued  Liabilities $330  - 

The  appearance  of  the  accounts,  Accrued  Liabilities  and 
Salaries,  after  posting  the  items  from  journal  entries  (1)  to  (4) 
is  shown  below.  As  you  trace  each  numbered  item  (1)  to  (4) 
explain  what  effect  it  has  on  assets,  liabilities,  or  capital. 

Salaries 


19— 
June 


July 


19— 
June 


30 


30 


Previous  entries 
(1)  J 

(4)  J 


(3)  J 
J 
J 


19— 

430 

- 

June 

30 

IS 

2  r 

50 

— 

<»« 

60 

- 

June 

3° 

P.  &  L.      (2)  J 


(3)  J 


Accrued  Liabilities 


16 

50 

_ 

- 

16 

70 

- 

16 

210 

- 

330 

- 

19— 

June 


3° 


Salaries 

Wages 

Taxes 


(i)J 
J 
J 


16 


16 


480 


480 


50 


50 

70 

210 

33o 


234  FUNDAMENTALS  OF  ACCOUNTING 

Accrued  Assets. — What  is  a  liability  to  one  person  is  an  asset 
to  another.  Thus  the  claim — the  account  receivable  asset — 
which  a  firm  has  against  a  customer  for,  say,  $500,  is  a  liability  of 
the  customer.  On-  the  customer's  balance  sheet  he  would  be 
shown  as  owing  $500  to  the  firm.  So  the  wages,  rent,  and  interest 
mentioned  above  as  liabilities  are,  from  the  standpoint  of  the  em- 
ployee, the  landlord,  and  the  money-lender,  claims  which  they 
have  against  the  business  and  therefore  assets.  Hence  what  has 
been  said  about  accruing  liabilities  applies  also  to  accruing  assets. 
The  business  may  at  times  be  in  the  position  of  a  landlord,  a 
money-lender,  or  even  an  employee.  Thus,  on  notes  receivable, 
the  interest,  accruing  or  accumulating  day  by  day,  may  be  due, 
in  accordance  with  custom  or  agreement,  at  the  end  of  the  period 
of  use  of  the  money.  If  the  end  of  the  fiscal  period  falls  before 
the  date  when  the  interest  is  due,  the  asset,  claim  for  interest 
earned  to  the  end  of  the  fiscal  period,  must  be  recorded,  since 
usually  no  record  is  made  until  the  interest  is  due  or  paid.  So, 
also,  if  the  business  rents  any  of  its  building  to  a  tenant,  and  the 
time  for  payment  of  the  rent  has  not  arrived  by  the  end  of  the 
fiscal  period,  the  claim  for  rent  accumulated  represents  an  in- 
crease in  assets  and  must  be  recorded.  These  assets,  therefore, 
which  have  been  accumulating  day  by  day,  which  have  not  been 
received — and  usually  are  not  due  because  the  customary  date  of 
payment  has  not  arrived — and  have  not  yet  been  recorded  are 
called  accrued  assets.  Both  accrued  liabilities  and  accrued 
assets  are  spoken  of  as  accruals. 

Recording  Accrued  Assets.— To  illustrate  the  method  of 
recording  accrued  assets,  assume  that  you  own  a  building  which 
you  leased  to  George  Bennett  on  April  30,  19-,  at  $300  per 
month,  payment  to  be  made  at  the  end  of  each  3  months'  tenancy. 
The  first  payment  of  $900  will  be  due  July  31.  It  is  now  June  30 ; 
therefore  Bennett  owes  you  $600  for  rent,  but  under  the  terms  of 
the  lease  payment  is  not  yet  due.  Your  claim  against  Bennett 
for  $600  is  an  accrued  asset.     The  item  has  not  been  entered  on 


ACCRUALS  235 

the  books,  although  it  has  been  earned,  because  in  the  ordinary 
course  of  events  it  would  be  recorded  at  the  time  of  payment, 
July  31.  If  you  desire  to  know  your  financial  condition  on  June 
30,  the  amount  of  this  asset  must  be  added  to  your  other  assets. 
With  the  increase  in  assets  evidenced  by  the  $600  claim  against 
Bennett,  there  is  an  equal  increase  in  capital,  because  liabilities 
have  not  changed. 

The  plan  for  recording  accrued  assets  is  similar  to  that  for 
recording  accrued  liabilities. 

In  general  terms  the  accrual  may  be  analyzed  as  follows : 

June  30 

Debit  some  account  representing  an  asset $600  - 

Credit  some  account  representing  a  capital  increase .  $600  - 

or,  more  specifically,  the  journal  record  would  be : 

June  30 

George  Bennett $600  - 

Rent $600  - 

This  indicates  an  increase  in  the  asset,  claim  against  George 
Bennett,  and  an  increase  in  capital  recorded  under  the  title, 
Rent.  The  debit  to  George  Bennett  is  not  altogether  desirable 
because  it  mixes  this  account  with  the  accounts  of  customers  to 
whom  merchandise  is  sold. 

A  standard  method  of  recording  accrued  assets  will  be 
explained. 

The  entries  when  made  in  accord  with  the  analysis  of  the 
transaction  will  be: 

June  30 

(1)  Accrued  Assets $600  - 

Rent $600  - 

To  record  the  accrual  of  2  months'  rent  of  build- 
ing at  $300  per  month  owed  by  George  Bennett  as 
per  lease  of  April  30,  19 — . 

The  account,  Accrued  Assets,  has  been  substituted  for  the 
account,  George  Bennett,  because  it  is  a  general  term  that  will 


236  FUNDAMENTALS  OF  ACCOUNTING 

serve  as  a  title  for  all  accrued  assets.  It  is  generally  more  con- 
venient to  use  it  as  a  temporary  account  from  which,  to  show  the 
cause  of  the  accrual,  the  debits  will  be  transferred  to  the  various 
accounts,  such  as  Rent,  Taxes,  Commission,  Salaries,  Interest, 
etc.  To  illustrate,  assume  that  the  Rent  account  has  been 
credited  $1,000  for  rents  paid  by  tenants,  then  the  total  credited 
to  Rent,  including  the  accrual  of  $600  owed  by  Bennett,  is  $1,600, 
which  is  transferred  to  Profit  and  Loss  as  follows : 

June  30 

(2)  Rent $1,600  - 

Profit  and  Loss $1,600  - 

To  transfer  the  amount  of  rent,  indicating 
increase  in  capital,  to  Profit  and  Loss  account,  to 
find  the  net  profit. 

The  third  entry  merely  transfers  the  asset  from  the  accrued 
account  to  the  Rent  account  to  offset  the  subsequent  credit  and 
indicate  how  much  of  the  credits  for  the  next  period  represents 
decrease  in  asset  and  how  much  increase  in  capital. 

June  30 

(3)  Rent $600  - 

Accrued  Assets $600  - 

To  transfer  the  asset,  uncollected  claims  for  rent, 
from  Accrued  Assets  to  Rent  account  for  conven- 
ience in  determining  what  amount  of  subsequent 
credits  to  this  account  represents  increase  in  capital 
and  what  amount  represents  decrease  in  assets  previ- 
ously recorded. 

The  next  entry  has  nothing  to  do  with  the  closing  entries  of 
the  old  period,  but  is  given  to  illustrate  more  fully  the  nature  of 
accrued  assets.  Assume  that  George  Bennett  paid  you  $900  in 
cash  for  3  months'  rent  on  July  3 1 .    This  will  be  recorded  as  follows : 

July  31 

(4)  Cash $900  - 

Rent $900  _ 

Received  from  George  Bennett  $900  in  cash  for 

rent  of  building  at  742  Park  Ave.,  for  the  3  months 

ended  July  31. 


ACCRUALS 


237 


The  effect  of  the  $900  credit  to  Rent  is  to  decrease  the  asset, 
consisting  of  our  claim  against  George  Bennett,  $600,  recorded 
originally  (June  30)  as  a  debit  to  Accrued  Assets  and  then  trans- 
ferred as  a  debit  to  Rent,  and  to  show  the  increase  of  capital,  $300, 
in  the  form  of  rent  services  rendered  which  accumulated  during 
July.  All  of  this  $300  has  now  been  earned  and  will  increase 
capital  (net  profit) . 

Entry  (3)  may  be  omitted  if  entry  number  (4)  for  July  31  is 
made  as  follows : 


July  31 


Cash 


Accrued  Assets . 
Rent 


|>6oo 
300 


This  shows  clearly  that  the  payment  of  $900  by  George 
Bennett  for  rent  has  increased  the  asset,  Cash,  $900,  decreased  the 
asset,  Accrued  Assets,  $600,  and  increased  capital  by  means  of 
rent  earnings,  $300. 

The  appearance  of  Accrued  Asset  account  and  the  Rent 
account  after  posting  items  (1)  to  (4)  from  the  journal  are  shown 
below.  As  you  trace  each  numbered  item  (1)  to  (4),  explain  the 
effect  it  has  on  assets,  liabilities,  or  capital. 


Rent 


19 
June 


June 


19— 

June 


30 


30 


3° 


P.  &L.    (2)  J 


(3)  J 


Rent       (1)  J 


1,600 


1,600 


600 


19— 
June 


July 


30 


3i 


Previous  entries 
(i)J 


Accrued  Assets 


600 


19— 
June 


30 


(4)  J 


(3)  J 


26 


1,000 
600 


1,600 


900 


600 


238  FUNDAMENTALS  OF  ACCOUNTING 

Summary. — In  all  accruals  there  is  an  increase  either  in  lia- 
bilities or  in  assets.  In  recording  accrued  liabilities,  a  debit  to 
some  expense  purchase  account  shows  the  increase  in  it,  while 
the  credit,  whether  shown  in  liability  account  or  to  the  "new" 
portion  of  the  same  expense  purchase  account,  indicates  the  lia- 
bility accrued.  Thus,  in  the  case  of  the  $50  salary  owed  to  the 
clerk,  the  increase  in  the  expense  purchase  has  been  consumed  in 
selling  the  goods — may  be  said  to  have  been  given  with  the 
goods — and  therefore  a  decrease  in  capital  has  resulted.  The 
amount  owed  to  the  clerk  increased  the  liabilities,  and  this 
liability  still  exists  as  shown  in  the  Accrued  Liabilities  account  or 
in  the  "new"  portion  of  Salaries  account. 

In  recording  accrued  assets,  a  debit  to  some  account  indicates 
an  increase  in  assets,  while  the  credit  shows  ultimately  the  in- 
crease in  capital  resulting,  therefrom. 

The  same  method  used  to  record  accrued  liabilities  is  used  to 
record  accrued  assets.  Other  methods  are  made  use  of,  but  the 
one  shown  here  is  preferred.  The  student  must  study  this  chap- 
ter very  carefully,  for  without  an  adequate  understanding  of  the 
matters  treated  here  he  is  not  ready  to  take  up  what  follows. 

Questions 

1.  What  is  meant  by  "accruals"? 

2.  How  many  groups  of  accruals  are  in  use?     Name  them. 

3.  What  is  an  accrued  liability?     Incurred  liability? 

4.  Give  five  examples  of  accrued  liabilities. 

5.  Does  the  accrued  liability  cause  an  increase  in  assets?     Explain. 

6.  Are  the  increased  assets  in  existence? 

7-  Ingeneral  terms  give  thejournal  entry  to  record  an  accrued  liability. 

8.  Give  all  journal  entries  with  explanations  for  recording  accrued 
liabilities. 

9.  (a)  What  is  an  accrued  asset?     (b)  Give  five  examples. 

10.  Does  the  accrued  asset  cause  an  increase  in  liabilities?    Explain. 

11.  In  general  terms  give  the  journal  entry  to  record  an  accrued  asset. 

12.  (a)  Give  all  journal  entries  with  explanations  for  recording  accrued 
assets. 

(b)  Set  up  the  various  ledger  accounts  affected. 


ACCRUALS  239 

13.  (a)  Give  all  journal  entries  with  explanations  for  recording  ac- 
crued liabilities. 

(b)  Set  up  the  various  ledger  accounts  affected. 

14.  What  is  the  net  effect  on  capital  of  accrued  liabilities?     Explain. 

15.  What  is  the  net  effect  on  capital  of  accrued  assets?     Explain. 

Problems 

1.  On  December  31, 1920,  the  date  of  closing  your  books,  you  owe  $3  70 
for  taxes  for  the  current  year,  payable  January  31,  1921. 

(a)  Write  the  necessary  journal  entries  with  explanations  to  close 
your  books  December  31. 

(b)  Post  to  the  proper  accounts  and  show  the  accounts  closed. 

2.  You  are  closing  your  books  for  the  year  ended  September  30. 
Your  Salaries  account  shows  previous  debits  of  $800  but  this  does  not 
include  $125.  which  you  owe  your  clerk,  Clyde  Jenkins,  for  one-half 
month's  services.  On  October  15  you  paid  Jenkins  $250  for  1  month's 
'services. 

(a)  Write  the  necessary  journal  entries  with  explanations  to  close  the 
books. 

(b)  Post  to  the  proper  accounts  and  show  the  accounts  closed. 

(c)  Journalize  and  post  the  October  15  payment. 

3.  You  rent  part  of  your  store  to  Joseph  Mills  at  $150  per  month. 
December  31, 1920,  Mills  owes  you  $450  for  3  months' rent.  January  31, 
192 1 ,  Mills  sends  you  check  for  $600  for  4  months'  rent. 

"    (a)  Write  the  journal  entries  to  close  your  books  December  31. 

(b)  Post  to  the  proper  accounts  and  show  the  accounts  closed. 

(c)  Journalize  the  receipt  of  the  $600  check  January  31  and  post  the 
entry. 

4.  James  K.  Hill  leased  a  store  building  to  Samuel  Towers  for  one  year 
from  January  1,  19 — ,  at  $200  per  month,  rent  to  be  paid  in  advance 
monthly.  All  rent  was  paid  up  to  June  30,  a  period  of  6  months.  But 
nothing  has  been  paid  since  June.  November  1  Towers  paid  all  back 
rent  and  rent  for  November. 

(a)  Write  journal  entries  to  close  Hill's  books  September  30. 

(b)  Post  to  the  proper  accounts  and  show  the  accounts  closed. 

(c)  Write  the  journal  entry  on  Hill's  books  to  record  Towers'  payment, 
after  which  post  to  the  ledger. 

5.  From  the  information  in  Problem  4 — 

(a)  Write  the  journal  entries  to  close  Towers'  books  September  30. 


240 


FUNDAMENTALS  OF  ACCOUNTING 


(b)  Post  to  the  proper  accounts  and  show  the  accounts  closed. 

(c)  Write  the  journal  entry  to  record  the  payment  to  Hill  on  November 
1  and  post. 

6.  From  the  following  trial  balance  and  additional  information: 

(a)  Write  journal  entries  to  close  Gardner's  books  on  June  30,  19 — . 

(b)  Post  to  the  proper  accounts  and  show  the  accounts  closed. 

(c)  Write  journal  entry  to  record  payment  of  rent  on  July  1 5  and  post. 

Joseph  Gardner,  Trial  Balance,  June  30,  19 — 


Cash 

Merchandise  Inventory . 
Accounts  Receivable .  .  . 
Merchandise  Purchases . 

Merchandise  Sales 

Expense 

Accounts  Payable 

Joseph  Gardner,  Capital 


250 
500 

375 
920 

45 


$2,090 


$1,090 

150 
850 


$2,090 


Additional  information  June  30,  19 — :  merchandise  inventory  $510; 
store  building  was  rented  from  Frank  Smith  at  $100  per  month  payable 
the  15th  of  each  month.  Rent  for  June  has  not  yet  been  paid-  The 
expense  item  of  $45  was  consumed  in  conducting  the  business. 

Note.  It  is  advisable  to  make  journal  entries  for  all  accruals  before 
writing  the  closing  journal  entries. 


Ralph  Moser,  Trial  Balance,  November  30,  i< 


Cash 

Merchandise  Inventory . 
Merchandise  Purchases . 

Merchandise  Sales 

Notes  Receivable 

Accounts  Receivable .  .  . 

Rent 

Salaries 

Accounts  Payable 

Ralph  Moser,  Capital .  . 


$  4,780 

- 

1,200 

- 

9.895 

- 

$10,890 

- 

200 

- 

750 

- 

200 

- 

150 

- 

2,285 

- 

4,000 

- 

$17,175 

- 

$17,175 

- 

ACCRUALS 


241 


Additional  information  November  30,  19 — :  merchandise  inventory 
$1,825;  salary  due  Charles  Costello,  but  not  payable  until  Saturday, 
December  3,  $135;  rent  was  paid  to  November  30,  19 — ;  commission 
accrued  on  sales  made  ior  Horace  Browne  but  not  payable  until  December 
1,  19— ,$25. 

From  the  above  trial  balance  and  additional  information — 

(a)  Write  journal  entries  to  close  Moser's  books  November  30,  19 — . 

(b)  Post  to  the  proper  accounts  and  show  the  accounts  closed. 

(c)  Write  the  journal  entries  to  record  the  payment  of  Costello's  sal- 
ary on  December  3  and  the  receipt  of  cash  for  commission  earned  on 
December  1  and  post  to  the  proper  accounts. 


8. 


George  Wildman,  Trial  Balance,  June  30,  19- 


Cash 

Merchandise  Inventory . . . 
Merchandise  Purchases . . . 

Accounts  Receivable 

Merchandise  Sales 

Accounts  Payable 

Rent 

Expense 

George  Wildman,  Drawing 
George  Wildman,  Capital . 


6,500 
1,500 
3,000 
4,Soo 


300 
600 
300 


$16,700 


4,000 
1,500 


11,200 


$16,700 


Additional  information:  merchandise  inventory  $1,700;  rent  prepaid 
1  month  $150;  electric  light  accrued  $25;  expense  inventory  $200. 
•   From  the  above  trial  balance  and  additional  information: 

(a)  Write  journal  entries  to  close  Wildman's  books  as  of  June  30, 
19—. 

(b)  Open  a  ledger  from  above  trial  balance. 

(c)  Post  the  adjusting  and  closing  entries  and  show  the  accounts 
closed. 

(d)  Take  a  post-closing  trial  balance. 

(e)  Prepare  a  balance  sheet. 

(f )  Prepare  a  profit  and  loss  statement  for  the  6  months  ended  June  30. 


16 


CHAPTER  XVI 
INTEREST 

Purpose  of  Chapter. — 

i .  The  nature  of  interest  cost  and  income. 

2.  The  nature  of  bank  discount. 

3.  Methods  of  calculating  interest. 

4.  Journal  entries  to  record  interest  on  notes. 

Definition  of  Interest. — In  previous  chapters  explanation  has 
been  made  of  various  expense  and  income  accounts  to  show  their 
purpose  and  use  in  keeping  track  of  certain  types  of  information 
vital  to  the  proper  conduct  of  business.  In  this  chapter  it  is  pur- 
posed to  explain  another  expense  and  another  income  account, 
Interest  Cost  and  Interest  Income. 

Interest  may  be  defined  as  the  charge  made  for  the  right  to 
use  money  borrowed  for  a  given  period  of  time.  Only  during  the 
last  few  centuries  has  the  morality  of  making  such  a  charge  been 
thoroughly  established.  Formerly  it  was  not  considered  right 
to  charge  another  for  the  use  of  money  lent  him.  Interest  is 
practically  the  same  as  rent.  If  a  building — business  or  apart- 
ment house — owned  by  one  man  is  leased  to  another,  the  owner 
always  requires  the  tenant  to  pay  for  the  use  of  his  property. 
The  charge  made  for  the  right  to  use  the  building  is  known  as  rent. 
There  are,  however,  two  points  of  difference  between  leasing  a 
building  and  borrowing  money:  (1)  If  a  building  is  rented,  the 
identical  building  must  be  returned,  while  in  the  case  of  money 
borrowed  any  dollars  amounting  to  the  same  total  as  the  dollars 
borrowed  may  be  returned;  (2)  title  to  the  building  does  not  pass 
to  the  one  using  it  (lessee),  i.e.,  the  building  remains  the  property 
of  the  owner  (lessor),  whereas  the  money  borrowed  actually 
becomes  the  property  of  the  borrower. 

242 


INTEREST  243 

Back  of  both  the  rent  and  interest  charges  is  the  idea  of 
rendering  a  service  valuable  to  the  user.  There  is  no  compulsion 
upon  the  owner  to  allow  another  to  use  his  property.  If  the 
other  party  can  use  the  property  to  advantage,  he  is  willing  to 
pay  for  that  use.  If  one  can  use  the  services  of  a  lawyer  or  of  a 
broker  or  agent  in  selling  his  goods,  he  is  willing  to  pay  for  such 
services.  In  the  same  way,  if  a  business  man  can  use  with  profit 
the  money  which  another  has  accumulated  he  is  willing  to  pay 
for  its  use.  This  right  to  use  money  or  the  charge  made  for  this 
right  is  called  "interest."  From  the  standpoint  of  the  borrower 
it  is  interest  cost  or  interest  expense,  while  from  the  standpoint 
of  the  lender  it  is  interest  income.  In  practice,  the  amount 
charged  is  almost  invariably  in  proportion  to  the  time  during 
which  the  money  is  used,  the  standard  method  being  so  many 
per  cent,  based  on  a  year's  use.  Thus,  interest  at  the  rate  of 
6%  means  a  charge  of  6  cents  for  each  dollar  borrowed  for  one 
year's  time.  If  the  money  is  used  for  a  shorter  period,  a  propor- 
tionately smaller  amount  will  be  charged.  Thus,  if  $1  is  bor- 
rowed for  6  months'  time,  the  charge  would  be  3  cents;  for  3 
months,  1  1/2  cents.  Wherever  the  interest  rate  is  given  without 
qualification  as  to  length  of  time,  a  year's  time  is  understood  as 
the  basis. 

The  Rate  of  Interest. — The  maximum  rate  charged  for  the 
use  of  money  is  governed  by  the  laws  of  the  state  where  the 
money  is  borrowed.  The  interest  charge  usually  begins  at  the 
time  the  money  is  borrowed.  If  a  promissory  note  is  given  and 
no  mention  of  interest  is  made  or  it  specifies  "without  interest," 
no  interest  can  be  charged  up  to  the  date  of  maturity,  but  from 
that  date  the  note  will  bear  interest  at  the  legal  rate.  So,  too, 
interest  may  be  charged  on  past-due  accounts.  In  many  states 
the  legal  rate  is  6%,  while  in  others  it  may  be  5%  or  even  8%. 
In  some  states  the  legal  and  maximum  rates  are  the  same,  while 
in  others  12%  is  permitted,  and  in  a  few  states  any  rate  the 
parties  agree  upon  may  be  charged.     If  the  maximum  rate  is 


244  FUNDAMENTALS  OF  ACCOUNTING 

higher  than  the  legal  rate,  the  rate  must  be  specified.  If  more 
than  the  legal  maximum  rate  is  charged,  it  is  termed  usury,  the 
penalty  for  which  depends  on  the  laws  of  the  state  where  the 
agreeement  was  made,  ranging  from  the  loss  of  the  interest 
charged  above  the  legal  rate  to  the  loss  of  both  principal  and 
interest.  The  student  should  look  up  the  laws  of  his  state  in 
regard  to  interest. 

Interest  Cost. — Interest  cost  usually  arises  in  connection 
with  notes  payable.  When  money  is  borrowed,  it  is  customary 
to  give  the  lender  a  promissory  note,  or  a  formal  promise  to  pay 
the  sum  borrowed  at  a  definite  future  time,  together  with  the 
interest  charge  for  its  use.  Borrowing  money  without  a  formal 
promise  to  pay,  a  word-of-mouth  promise  being  deemed  sufficient, 
is  not  met  with  in  business,  although  sometimes  resorted  to 
among  friends.  The  student  will  see  in  a  later  chapter  (XXVI) 
how  the  bank  serves  the  business  community  in  lending  money. 
In  borrowing  money  from  a  bank  it  is  customary  to  pay  the 
interest  in  advance  instead  of  at  the  maturity  of  the  loan.  Thus, 
if  A  desires  to  borrow  $1,000  at  6%  for  2  months'  time,  the 
banker,  instead  of  giving  $1,000,  turns  over  $990,  deducting  his 
interest  of  $10  at  the  beginning  of  the  loan.  When  A  pays  back 
the  loan,  he  will  pay  $1,000.  The  transaction  is  the  same  as  if 
the  banker  had  turned  over  the  full  amount,  $1,000,  and  the 
borrower  had  immediately  paid  his  interest  of  $10  instead  of 
waiting  until  the  maturity  of  the  loan. 

In  the  case  of  other  loans  than  those  made  by  a  banker,  the 
interest  is  not  paid  until  the  maturity  of  the  loan.  Thus,  if 
Dennis  borrows  $1,000  at  6%  for  2  months'  time  from  Wright, 
Dennis  will  receive  $1,000  which  he  will  use  for  the  2-month 
period.  When  he  repays  the  loan,  he  will  return  to  Wright  not 
only  the  $1,000  borrowed  but  the  $10  interest.  In  all,  Dennis 
will  thus  pay  $1,010.  In  the  case  of  long-term  loans  extending 
more  than  a  year  or  even  6  months,  it  is  not  an  infrequent  pro- 
vision that  the  interest  shall  be  paid  at  the  end  of  certain  definite 


INTEREST  245 

periods  until  the  maturity  of  the  loan,  such  as  every  6  months  or 
every  year.  Thus,  in  the  case  of  $1,000  borrowed  for  3  years  at 
6  %,  interest  payable  annually,  at  the  end  of  the  first  year  the 
borrower  would  pay  $60  for  interest  to  the  lender  for  that  year, 
and  similarly  $60  at  the  end  of  the  second  and  third  years. 

Analysis  of  Interest  Cost. — We  may  analyze  interest  cost 
under  two  heads,  namely,  when  paid  in  advance,  and  when  paid 
at  maturity. 

When  paid  in  advance,  the  interest  cost  is  an  asset,  just  as 
rent  paid  in  advance  or  insurance  purchased.  '  The  method  of 
recording  is  therefore  the  same  as  that  of  any  other  asset  pur- 
chased. The  item  is  a  charge  or  debit  to  the  Interest  Cost  ac- 
count. If  a  cash  payment  was  made  to  cover  the  cost,  Cash  is 
credited  to  show  the  decrease  of  the  asset,  Cash.  Day  by  day, 
as  we  use  the  borrowed  money  the  interest  paid  in  advance  is 
consumed.  It  is  not  customary,  however,  to  make  an  entry  each 
day  to  show  how  much  paid-in-advance  interest  has  been  used 
that  day.  At  the  end  of  the  fiscal  period,  in  determining  the 
status  of  every  account,  it  is  necessary  to  determine  how  much  of 
the  interest  paid  in  advance  has  been  used,  that  amount  con- 
stituting the  interest  expense  charge  for  the  period.  The  unused 
portion  will  be  an  asset  and  will  be  carried  over  into  the  next 
period. 

In  the  case  of  interest  which  is  not  paid  until  the  end  of  an 
agreed  time,  that  is,  until  the  money  has  been  used,  the  item  is  a 
consumed  asset.  This  we  call  an  expense,  that  is,  money  spent 
for  which  there  is  no  direct  tangible  return.  When  money  is 
spent  in  the  purchase  of  a  stock  of  merchandise,  there  is  a  tangible 
return  for  the  asset  given  in  exchange.  When  money  is  spent  for 
the  use  of  another  asset,  as  in  the  case  of  borrowed  money,  while 
the  use  of  that  asset  has  brought  something  of  value  to  the  busi- 
ness, it  is  not  a  tangible  thing  but  something  which  will  be 
reflected  in  increased  profits  for  the  period.  The  item  is  of  some- 
what the  same  nature  as  salesmen's  salary  expense.     The  business 


246  FUNDAMENTALS  OF  ACCOUNTING 

man  exchanges  his  cash  for  the  services  of  his  salesmen.  That 
service  is  not  a  tangible  asset,  but  he  can  secure  a  better  price  for 
his  commodity  because  he  has  a  store  and  a  sales  force  to  take 
care  of  customers.  However,  at  the  time  of  paying  the  salesman's 
salary  it  is  neither  customary  nor  considered  good  business  prac- 
tice to  charge  the  salesman's  salary  as  an  increase  in  the  value  of 
the  merchandise  dealt  in.  The  return  from  the  money  given  the 
salesman  for  his  service  is  secured  only  when  the  goods  are  sold, 
never  previous  to  that  time.  Hence,  it  is  the  standard  practice 
to  treat  it  as  an  expense  item,  and  deduct  it  from  the  gross  profit 
on  sales. 

In  the  same  way  interest  expense,  or  cost  of  using  money,  is 
to  be  treated  as  a  deduction  from  the  income  or  profit  that  may 
come  from  the  use  of  money.  In  other  words,  it  is  a  consumed 
rather  than  a  present  asset.  Whether  the  interest  payment  is 
made  in  advance  or  after  the  use  of  the  money,  standard  practice 
is  to  charge  it  to  the  Interest  account.  The  exact  nature  of  the 
account,  therefore,  is  determinable  only  upon  analysis  made  at 
the  end  of  a  regular  fiscal  period  to  show  accurate  results  of 
business  operations  for  that  period. 

Interest  Income. — Just  as  rent  income  represents  income  from 
allowing  the  use  of  a  building,  so  interest  income  is  income  from 
selling  the  right  to  use  money.  What  constitutes  interest  cost 
from  the  standpoint  of  the  borrower  becomes  interest  income 
from  the  standpoint  of  the  lender.  The  analogy  between  inter- 
est cost  and  interest  income  is  similar  to  that  between  accounts 
payable  and  accounts  receivable,  to  this  extent:  Both  items  arise 
from  the  same  transaction.  Just  as  an  account  receivable  from 
the  standpoint  of  the  seller  is  an  account  payable  from  the  stand- 
point of  the  buyer,  so  an  interest  cost  from  the  standpoint  of  the 
borrower  of  money  is  an  interest  income  from  the  standpoint  of 
the  lender.  In  the  first  illustration  on  page  244  the  bank  lend- 
ing money  received  from  A  income  to  the  amount  of  $10  be- 
fore any  return  was  given  for  it.     In  the  second  illustration 


.  INTEREST  247 

Wright,  the  lender,  does  not  receive  the  $10  until  the  end  of  the 
2  months'  time  during  which  Dennis  has  had  the  use  of  the 
money.  Hence,  Wright  will  receive  not  only  the  $10  in  payment 
for  use  of  the  money  but  also  the  $1,000  return  of  the  money 
lent. 

In  the  case  of  a  long-term  loan,  as  explained  above,  by  agree- 
ment the  interest  is  to  be  received  at  certain  stated  periods,  and 
at  the  end  of  the  last  period  the  principal  sum  loaned  will  also  be 
received. 

Analysis  of  Interest  Income. — The  analysis  of  interest  in- 
come will  be  discussed  under  the  two  heads:  income  received 
in  advance,  and  income  received  after  the  money  has  been 
used. 

In  the  first  illustration  given  above  under  interest  cost,  the 
bank  allows  the  borrower  to  use  the  money  for  2  months.  The 
bank  is  therefore  liable  on  the  date  of  the  receipt  of  the  $10  for  2 
months'  use  of  its  money  by  A.  The  $10  will  consequently  be 
shown  as  a  liability,  i.e.,  a  credit  in  the  Interest  Income  account. 
Day  by  day,  through  the  borrower's  use  of  the  money,  the  lia- 
bility is  being  canceled  and  an  income  item,  an  increase  of  capital, 
is  taking  its  place.  This  item  records  the  income  received  for 
the  service  rendered  by  the  bank.  It  is  not  customary  to  record 
this  cancellation  of  the  bank's  liability  daily,  but  only  at  the  end 
of  the  fiscal  period.  If  at  that  time  the  bank's  contract  with  the 
borrower  still  has  some  time  to  run,  a  portion  of  the  account  must 
still  be  shown  as  a  liability,  while  the  rest  represents  income  from 
the  use  of  the  money  during  the  period.  This  is  an  illustration  of 
an  increase  in  capital  through  a  decrease  in  liabilities. 

In  the  second  illustration,  in  which  Wright  does  not  receive 
his  interest  income  until  after  he  has  allowed  the  use  of  his  money 
for  the  agreed  time,  the  entire  $10  is  an  income  item  and  must  be 
so  treated.  Except  in  the  case  of  banks,  it  is  not  customary 
to  book  an  interest  income  item  until  after  the  service  has  been 
rendered  to  the  borrower. 


248  FUNDAMENTALS  OF  ACCOUNTING 

Usual  Methods  of  Obtaining  Money.— The  principal  sources 
from  which  one  may  obtain  the  use  of  other  people's  money  are 
as  follows: 

i .  From  a  bank. 

2.  From  a  money-lender. 

3.  From  creditors  who  extend  time  of  payment  on  condition 

that  interest  be  paid. 

4.  From  friends. 

The  usual  practice  is  to  obtain  the  necessary  money  from  the 
first  three  sources. 

The  methods  of  obtaining  the  money  are : 

1.  By  giving  a  promissory  note  without  interest  for  the  exact 

amount  of  the  money  borrowed. 

2.  By  giving  a  promissory  note  with  interest.     This  may  be 

with  or  without  security,  i.e.,  the  one  giving  the  note 
may  mortgage  all  or  part  of  his  property  or  give  collateral 
security  for  the  payment  of  the  note,  or  he  may  merely 
sign  the  note  and  not  pledge  property  which  may  be 
sold  upon  failure  to  pay  the  note. 

3.  By  paying  interest  on  overdue  accounts  payable. 

4.  By  selling  (discounting) — 

(a)  His  own  note  without  interest. 

(b)  Another's  note  (note  receivable)  without  interest. 

(c)  Another's  note  with  interest. 

5.  By  giving  his  own  note  with  interest  included  in  the  face 

of  the  note. 

Calculating  Interest. — Since  most  interest  problems  occur  in 
connection  with  notes,  we  shall  explain  the  methods  of  calculating 
interest  under  various  conditions. 

1.  Finding  the  Date  of  Maturity  of  Notes. — If  the  time  is 
given  in  months,  a  calendar  month  is  understood,  and  the  note 
will  be  due  the  corresponding  date  in  one  of  the  succeeding 


INTEREST  249 

months.  For  example,  a  3-months'  note  dated  January  5  will 
be  due  the  5th  day  of  a  month  3  months  later,  or  April  5.  If  the 
corresponding  date  does  not  appear  in  the  final  month  of  the 
term,  the  note  will  be  due  on  the  last  day  of  that  month.  For 
example,  notes  dated  December  29,  30,  31,  for  2  months,  will 
be  due  February  28  of  the  following  year,  or  in  leap  years, 
February  29. 

If  the  time  is  given  in  days,  count  the  exact  number  of  days 
forward,  excluding  the  date  the  note  is  given  and  including  the 
date  of  maturity. 

Example:  A  90-day  note  dated  June  8  will  be  due  September  6. 
Solution:  This  is  obtained  as  follows:  Excluding  the  date  given,  we 
have — 

Remaining  in  June 22  da. 

"July 31    " 

"  August 31    " 

84    " 
Required     in     September 6    " 

Total 90    " 

If  the  time  is  30  days  or  even  multiples  of  30  days,  an  easy 

method  for  finding  the  due  date  is  to  add  30  days  at  a  time.     In 

the  example  above  we  would  proceed  as  follows: 

30  days  forward  from  June  8  gives  July  8;  30  days  forward  again  gives 
August  7 ;  and  30  days  additional  gives  September  6. 

2.  Computing  the  Time  Between  Two  Dates. — Three  methods 
of  rinding  the  time  between  two  dates  are  given  below : 

Counting  Actual  Number  of  Days.  This  will  be  used  only 
where  the  period  is  less  than  one  year. 

Example:  Find  the  number  of  days  between  November  14,  1920,  and 
January  26,  1921. 
Solution: 

Remaining  in  November 16  da. 

"  "December 31    " 

Required     "  January 26    " 

Total 73    " 


250  FUNDAMENTALS  OF  ACCOUXTIXG 

Compound  Subtraction.  This  may  be  used  for  a  period  of  any 
length. 

Example:  Find  the  time  between  July  27,  1919,  and  April  2,  1921. 
Solution:  Write  the  first  date  below  the  last  date  and  subtract.     If 
the  days  and  months  in  the  lower  date  line  are  larger  than  the  days  and 
months  in  the  upper  date  line,  reduce  one  month  to  days  and  one  year  to 
months. 

Year  Month  Day 

20  15  32 

1927  #  ? 

1919  _7_  27 

1  8  T 

Bankers1  Time.  This  is  used  by  some  banks  for  periods  of  more 
than  one  month.  State  the  time  in  months  and  days  by  taking 
the  whole  months  and  the  actual  days  in  the  fraction  of  the  month 
remaining. 

Example:  Find  the  time  between  February  15,  1921,  and  November  7, 
1921. 

Solution: 

From  Feb.  1 5  to  Oct.  1 5  is 8  mo. 

"      Oct.  15  "  Nov.  7  " 23  da. 

Total 8  mo.  23  da. 


3.  The  60-Day  Method.— Of  the  several  methods  for  finding 
interest,  most  use  360  days  as  a  year,  which  is  considered  as  com- 
posed of  12  months  of  30  days  each.  Since  most  notes  are  given 
for  30,  60,  or  90  days,  the  60-day  method  is  convenient.  It 
affords  a  positive  check  on  solutions  and  requires  only  the  simple 
operations  of  addition  and  division. 

It  is  readily  seen  that  the  interest  on — 


S 


for  1  yr.  at  6%  is $.06 

"    2  mo.  or  60  da.  at  6%  (1/6  of  a  yr.)  is 01 

6  da.  at  6%  (1/10  of  60  da.)  is 001 

"    600  da.  at  6%  (10  X  60  da.)  is : 10 

"    6,000  da.  at  6%  (100  X  60  da.)  is 1.00 


> 


INTEREST  251 

Therefore,  to  find  the  interest  on  any  sum  of  money  for  60 
days  (2  months)  at  6%,  multiply  by  $.01,  which  is  equivalent  to 
moving  the  decimal  point  two  places  to  the  left.  For  6  days  the 
decimal  point  is  moved  three  places  to  the  left;  for  600  days  one 
place  to  the  left.  For  6,000  days  the  decimal  point  is  not  moved 
because  the  interest  will  be  the  same  as  the  principal. 

Example:     Find  the  interest  on  $384.72  for  60  days  at  6%. 
Solution:  The  interest  on  $1  for  60  days  at  6%  is  $.01. 
The  interest  on  $384.72  is  384.72   X  $.01,  or  $3.8472.     Since  7  mills 
is  more  than  }4  cent  we  add  an  additional  cent,  making  the  interest  $3.85. 

From  this  it  is  evident  that  the  interest  for  6  days  at  6%  will 
be  1/10  of  the  interest  for  60  days,  therefore  the  decimal  point  is 
moved  one  additional  place  to  the  left,  or  3  places  to  the  left  in 
the  original  principal.  Using  the  same  example,  but  changing 
the  time  to  6  days  we  have, 

384.72  X  S-ooi,  or  $.38$/ 

If  the  time  is  not  60  days,  the  same  method  may  be  used  by 
dividing  the  time  so  that  the  interest  for  each  part  may  be  found 
from  a  previous  part,  or  from  60  days. 

Example:  Find  the  interest  on  $384.72  for  52  days  at  6%. 
Solution: 


*3 

84.72  =  int.  for  60  da.  at  6% 

1 
1 

9236    =  int.  for  30  da.  at  6%  (1/2    of  60) 
2824   =    "     "    20  "    "   6      (1/3    of  60) 
1282    =    "     "      2  "    "   6      (i/ioof  20) 

$3|3342    =  int.  for  52  da.  at  6% 

Note:  To  secure  accuracy  carry  out  all  calculations  to  four  decimal 
places. 

Examples  may  be  checked  by  dividing  the  time  into  different 
parts  of  60  days.  The  following  solution  affords  a  check  on  the 
above  example. 


252 


FUNDAMENTALS  OF  ACCOUNTING 
72  =  int.  at  6%  for  60  da. 


I 

2824   =  int.  for  20  da.  at  6%  (1/3    of  60) 

I 

2824   =    "     "    20    "     "  6      (1/3    of  60) 

3847    =    "     "     6    "    "  6      (1/10  of  60) 

3847    =    "     "     6    "     "  6      (i/ioof  60) 

$3 

3342    =  int.  for  52  da.  at  6% 

6%. 


Example:     Find  the  interest  on  $384.72  for  1  yr.  3  mo.   12  da.  at 


Solution: 

Time:  1  yr.  3  mo.  12  da.  =  15  mo.  (14  mo.  and  1  mo.)  +  12  da. 

.72  =  int.  for  60  da.  (2  mo.)  at  6% 


>2Q 


26 

9304    =  int.  for  14  mo.  at  6%  (7X2  mo.) 

I 

9236    =    "     "     1     "     "  6      (1/2  of  2  mo.) 

7694    =    "      "   12  da.     "6      (1/5  of  60  da.) 

6234    =  int.  for  15  mo.  12  da.  at  6% 


To  find  the  interest  at  any  Tate,  first  find  the  interest  at  6% 
as  explained,  and  then  divide  by  6  to  find  the  interest  at  1%, 
after  which  multiply  by  the  required  rate. 


5%- 


Example:  Find  the  interest  on  $420  for  60  days:  (a)  at  3K  %\  (b)  at 


Solution: 

(a)  Divide  by  6)  $4 


20        =  int.  60  da.  at  6% 


70        =  int.  60  da.  at  1% 
3  1/2 


35 
10 


I  multiplied  by  3  1/2 


$2|45 
(b)  Divide  by  6)  $4 


§3 


=  int.  60  da.  at  3  1/2% 

=  int.  60  da.  at  6% 

=  int.  60  da.  at  1%  (Subtract) 


50         =  int.  60  da.  at  5% 


4.  Variation  of  the  60-Day  Method. — The  principle  involved 
in  the  60-day  method  may  be  applied  at  different  rates  as  follows : 


INTEREST 


253 


Example:  Find  the  interest  on  $420  for  72  days  at  5%;  90  days 
at  4%. 

Solution:  If  it  requires  360  days  to  earn  $.05  on  $1,  it  will  require 
7s  of  360  days,  or  72  days,  to  earn  $.01.  Then  a  5%  rate  becomes  the  72- 
day  method  and  a  4%  rate  becomes  the  90-day  method,  etc. 

$4|20  -  int.  72  da.  at  5%  $4|20  =  int.  90  da.  at  4% 

The  number  of  days  required  to  earn  $.01  on  $1  at  a  given 
rate  may  be  found  by  dividing  360  days  by  the  number  repre- 
senting the  rate.  The  following  table  gives  the  rates  most 
conveniently  used : 


Period  Required  to  Earn  $.01  on  $1 

Cents  Earned  on  $1  in 
360  Days 

Rate 

Part  of  a  Year  of 

Number  of 

360  Days 

Days 

1% 

• 
.01 

1 

360 

1  1/2 
2 

.01  1/2 
.02 

2/3 
1/2 

240 

180 

2  1/2 

.02  1/2 

2/5 

144 

3 

•03 

i/3 

120 

4 

4  1/2 

.04 
.04  1/2 

1/4 
2/9 

90 
80 

5 
6 

•05 
.06 

i/5 

1/6 

72 
60 

7  1/2 
8 

.07  1/2 
.08 

2/1 S 

1/8 

48 

45 

9 
10 

.09 
.10 

i/9 
1/10 

40 
36 

12 

.12 

1/12 

30 

15 

18 

•15 
.18 

i/i5 
1/18 

24 
20 

20 

•.20 

1/20 

18 

24 

.24 

1/24 

IS 

>54  FUNDAMENTALS  OF  ACCOUNTING 

Example:  Find  the  interest  on  $567.24  at  4  1/2%  for  84  days. 
Solution: 


$5 


$1  at  4  1/2%  for  80  da.  =  $.01 
67.24  =  int.  80  da.  at  4  1/2% 
2836  =    "       4  "     "   4  1/2     (1/20  of  80) 


3 

00  =  int.  60  da.  at  6% 

1 

50  =           30               6 

10  =      "       2      "      "  6 

95  60  =  int.  84  da.  at  4  1/2% 
$5.96  Ans. 

5.  Interchanging  Principal  and  Time. — In  some  problems  the 
interest  computation  is  simplified  by  interchanging  the  numbers 
representing  the  principal  and  the  time. 

Example:  Find  the  interest  on  $300  at  6%  for  92  days. 

Solution  (a)  Solution  (b) 

$3|oo  =  int.  60  da.  at  6%        Interchanging  principal  and   time,  the 

problem  would  read:  Find  the  interest 
on  $92  at  6%  for  300  days. 
$9)20  =  int.  600  da.  at  6% 
60  =  int.  92  da.  at  6%        N6°  =  int.  300  da..at  6%  (1/2  of  600) 

6.  To  Find  the  Accurate  Interest. — Accurate  or  exact  interest 
is  based  on  365  days  to  the  year.  It  is  more  troublesome  to  com- 
pute and  therefore  not  so  generally  used  in  ordinary  commercial 
computations.  Where  accurate  interest  is  desired  it  may  be 
found  by  first  finding  the  interest  on  the  basis  of  360  days  and 
then  deducting  1/73  of  this  interest.  The  difference  between 
365  days  and  360  days  is  5  days,  which  is  1/73  of  365  days,  the 
new  divisor.  Since  the  divisor,  365,  is  1/73  larger  than  360,  the 
quotient  will  be  1/73  smaller. 

Example:  Find  the  accurate  interest  on  $730  at  6%  for  60  days. 
Solution: 


Divide  by  73)  $7 


30  =  int.  60  da.  at  6%  (360  da.  to  the  year) 

10  =  1/73  of  $7.30         (Subtract) 


20  =  int.  60  da.  at  6%  (365  da.  to  the  year) 


INTEREST  255 

Both  -accurate  and  ordinary  commercial  interest  may  be 
found  readily  by  using  interest  tables. 

Finding  the  Amount. — The  amount  of  a  debt  without  in- 
terest is  the  face  of  the  debt  at  maturity,  which  begins  to  bear 
interest  at  the  legal  rate  only  after  maturity.  The  amount  of  a 
debt  with  interest  is  the  sum  of  the  principal  and  the  interest  to 
maturity. 

Example:  Find  the  amount  of  $420  for  66  days  at  6%. 
Solution: 

20  =  int.  60  da.  6% 
42  =     "     6    "  6% 


4 
420 


62  =  int.  66  da.  6% 
=  principal 


$424^2  =  amount 

Discounting  Notes. — Another  interest  problem  arises  when 
notes  are  sold.  Since  the  note  is  a  promise  to  pay  money  at  a 
future  date  it  is  evidently  not  worth  its  final  or  maturity  value  at 
any  date  before  maturity.  As  a  result  of  custom  and  later  of 
law,  the  maturity  value  or  amount  (principal  plus  interest)  of  a 
note  is  taken  as  the  base,  and  the  interest  from  the  date  of  sale 
to  maturity  (discount)  is  computed  on  this  amount.  The  one 
purchasing  the  note  gives  up  the  use  of  his  money  from  the  date 
of  discount  to  the  date  of  maturity  and  is  therefore  entitled 
to  interest  for  the  time  he  must  wait  until  the  money  is  repaid. 
The  seller  of  the  note  (discounter)  gets  approximately  the  present 
value  of  the  note  in  the  form  of  money  or  credit,  while  the  buyer 
of  the  note  (lender)  agrees  to  wait  a  certain  time  for  his  money, 
for  the  use  of  which  he  has  received  payment  in  advance. 

Example :  John  Jones  owns  a  60-day  note  for  $500  without  interest, 
dated  June  15,  1920,  and  signed  by  William  Watson.  Jones  needs  money 
and  arranges  to  sell  (discount)  the  note  to  the  bank  on  the  same  date,  the 
interest  rate  being  6%. 


256  FUXDAAIEXTALS  OF  ACCOUNTING 

Solution:  Since  the  note  does  not  bear  interest,  the  bank  .will  receive 
at  maturity  S500.  At  the  rate  of  6%  for  60  days  the  interest  is  $5.  The 
bank  deducts  $5  from  $500  and  gives  Jones  $495  in  money. 

This  is  an  ordinary  interest  problem  except  that  the  S5  for  the 
use  of  $500  is  taken  in  advance;  and  that  Jones  receives  only  $495. 
This,  of  course,  makes  the  actual  rate  more  than  6%  and  favors 
the  money-lender.  To  make  the  rate  exactly  6%  one  would 
have  to  find  what  sum  of  money  placed  at  interest  at  6%  would 
amount  to  $500  in  60  days,  i.e.,  the  true  present  worth  of  $500 
at  6%  for  60  days.  However,  due  perhaps  to  the  fact  that 
it  favors  the  money-lender  and  is  more  easily  computed,  the 
amount  due  at  maturity  is  used  as  the  base  in  discount 
problems. 

Expressions  Used  in  Discount  Problems. — The  meanings  of 
certain  expressions  used  in  discount  problems  and  their  applica- 
tion are  shown  below. 

1.  Date  of  maturity  means  the  date  on  which  the  note  will  be 
due.     Seepages  248  to  250. 

2.  Term  of  discount  is  the  time  from  the  date  of  discount  to 
the  date  of  maturity.  Find  the  exact  number  of  days.  This  is 
the  time  the  lender  gives  up  the  use  of  his  money. 

3.  The  interest  refers  to  the  interest  on  the  note  from  the 
date  of  the  note  to  the  date  of  maturity.  This  may  be  at  any 
legal  rate. 

4-  The  principal  is  the  face  of  the  note. 

5-  The  amount  is  the  sum  of  the  principal  and  interest. 

6.  The  rate  of  discount  is  the  rate  of  interest  charged  for  the 
use  of  the  money  at  the  time  the  note  is  sold. 

7.  The  discount  is  the  interest  computed  on  the  amount  for 
the  term  of  discount  at  the  rate  of  discount. 

8.  The  proceeds  is  the  remainder  after  deducting  the  discount 
from  the  amount,  and  represents  the  amount  of  money  the 
borrower  (seller  of  the  note)  receives. 


INTEREST 


257 


Example:  You  own  a  3 -month  note  for  $1,200  with  interest  at  6% 
dated  September  12,  1920,  signed  by  Charles  Burke.  On  September  30, 
1920,  you  discount  this  note  at  5%  at  the  bank. 

Solution: 

(1)  September  12, 1920+  3  mo.  =  Dec.  12,  1920,  date  of  maturity. 

(2)  Sept.  30,  1920  to  Dec.  12,  1920  =  73  days,  term  of  discount. 


(3) 
(4) 
(S) 


$12 

6 

00 
00 

=  int.  2  mo. 
_     «   1     " 

at  6% 
"6 

18 
1,200 

=  int.  3  mo. 
=  principal 

at  6% 

$1,218 

=  amount 

$12 

2 


(6)  and  (7) 

(5)  . 
-(7) 
=  (8) 


18    =  int.  60  da.  at  6% 
03     =     "   10    "    "  6 
609  =     "     3    "    "  6 


819  =  int.  73  da.  at  6% 
469  =     "    73     "     "  1 


350  =  int.  73  da.  at  5%,  the  discount 

$1,218         =  the  amount 
12  35    =  the  discount 


$1,205 


65    =  the  proceeds 


It  is  understood  that  the  borrower  can  sell  (discount)  his  own 
note  (note  payable)  as  well  as  a  note  signed  by  another  (note 
receivable). 


Booking  Interest  Cost. — The  account  title,  Interest  Cost, 
includes  both  interest  paid  in  advance  and  after  the  use  of  the 
money.  Thus,  bank  discount,  which  the  bank  deducts  at  the 
time  of  lending  money,  is  included  in  the  Interest  Cost  account. 
Sometimes  the  title,  Interest  and  Discount,  is  used  to  show  that 
both  interest  as  such  and  interest  as  bank  discount  are  to  be 
recorded  thereunder.  There  is  nothing  gained,  however,  by  use  of 
the  double  title,  as  the  student  will  know  that  whether  the  item 
is  bank  discount  or  interest,  it  will  be  recorded  under  the  title, 
Interest  Cost.  Several  illustrations  will  be  given  of  transactions 
involving  interest  cost. 


258  FUNDAMENTALS  OF  ACCOUNTING 

Case  i.  Borrowing  Money  on  a  Non-Interest-Bearing  Note 
Payable.  A  borrows  $1,000  from  his  banker  for  2  months  at  6% 
discounting  his  note  therefor. 

The  analysis  of  the  transaction  shows  that  A  received  $990 
cash  in  return  for  a  promise  to  pay  61,000  at  the  end  of  2  months, 
the  $10  being  interest  paid  in  advance.  The  booking  of  the 
transaction  will  be  as  follows : 

Cash $990  - 

Interest  Cost 10  - 

Notes  Payable Si, 000  - 

As  stated  above,  the  interest  cost  item  is,  at  the  date  of  mak- 
ing the  entry,  an  asset,  a  prepaid  expense,  incurred  at  the  time 
the  money  is  borrowed.  It  is  much  the  same  as  rent  paid  in 
advance. 

When  the  loan  comes  due  and  is  paid,  the  following  entry 
will  be  made: 

Notes  Payable Si ,000  - 

Cash $  1 ,000  - 

This  shows  the  decrease  of  the  note  payable  liability  and 
the  decrease  of  the  asset.  Cash,  caused  by  the  payment  of  the 
liability. 

Case  2.  Borrowing  Money  on  an  Interest-Bearing  Note,  Not 
Discounted.  Dennis  borrowed  $1,000  from  Wright,  a  money- 
lender, for  2  months'  time,  giving  his  note  and  agreeing  to  pay 
him  interest  at  the  rate  of  6%  at  the  maturity  of  the  note.  At 
the  time  the  money  is  received  he  will  make  the  following  entry : 

Cash $1,000  - 

Notes  Payable $1,000  - 

When  the  loan  comes  due  and  he  repays  Wright,  he  will  make 
the  following  entry : 

Notes  Payable $1,000  - 

Interest  Cost IO  - 

Cash $1,010  - 


INTEREST  259 

The  debit  to  Notes  Payable  indicates  the  decrease  of  the 
former  note  payable  liability  of  $1,000;  the  charge  to  Interest 
Cost  of  $10  is  payment  made  for  the  use  of  the  money,  an  expense 
item,  or  consumed  asset  which  causes  a  $10  decrease  in  capital, 
while  the  credit  of  $1,010  to  Cash  indicates  the  decrease  of  the 
asset,  Cash. 

Case  3.  Borrowing  on  the  Note  Payable  with  Interest  Included  in 
the  Face  Amount.  It  sometimes  happens  that  a  note,  instead  of 
being  made  interest-bearing  is  made  non-interest-bearing  for  a 
larger  amount,  sufficient  to  include  the  interest  which  would  be 
payable  at  the  date  of  maturity.  This  has  the  advantage  of 
making  known  at  the  time  of  issue  the  amount  of  interest  that 
will  have  to  be  paid.  If  you  borrow  $1,000  from  George  Strubie 
for  60  days,  with  interest  at  6%,  you  may  make  either  an  inter- 
est-bearing note  for  $1,000  and  pay,  in  settlement,  both  $1,000, 
the  face  of  the  note  and  $10  for  interest  when  the  note  comes  due, 
or  you  may  make  a  non-interest-bearing  note  for  $1,010,  paying 
the  face  of  the  note,  $1,010,  when  it  comes  due. 

(a)  When  such  a  note  is  issued,  the  entry  will  be  as  follows: 

George  Strubie $1,000  - 

Interest  Cost 10  -        '   > 

Notes  Payable $1,010  - 

Note  that  the  Interest  Cost  item  of  $10  is  recorded  on  the 
books  before  it  is  paid,  a  liability  of  $10  for  it  being  included  in 
the  face  of  the  note,  $1,010. 

The  student  should  make  sure  that  he  understands  the  nature 
of  the  Interest  Cost  item  recorded  above.  At  the  date  the  record 
is  made  there  is  no  interest  used  up,  the  $10  item  being  an  asset 
awaiting  consumption.  Day  by  day,  as  the  date  of  maturity 
approaches,  this  asset  is  being  consumed.  No  record  is  made  of 
this  unless  it  becomes  necessary  to  draw  up  a  balance  sheet  be- 
fore the  date  of  maturity  of  the  note.  In  this  case  it  is  necessary 
to  separate  the  item  into  the  portion  which  has  been  consumed 
and  the  portion  still  unconsumed.     The  first  portion  is  an  expense 


260  FUNDAMENTALS  OF  ACCOUNTING 

or  capital  decrease,  the  second  an  asset  which  will  appear  on  the 
balance  sheet  as  a  deferred  or  prepaid  expense. 

(b)  When  the  note  is  paid  the  following  entry  is  made : 

Notes  Payable $1,010  - 

Cash $1,010  - 

Case  4.  Selling  or  Discounting  a  N on-Interest-Bearing  Note 
Receivable.  If  a  non-interest-bearing  note  with  face  value  of 
$1,000,  due  in  60  days,  is  received  from  Richard  Smith,  the  entry 
would  be : 

Notes  Receivable $1,000  - 

Richard  Smith $1,000  - 


If  the  note  were  paid  30  days  before  it  became  due  or  were 
sold  to  a  bank  (discounted),  the  interest  rate  being  6%,  the 
"discount"  would  be  $5  and  you  would  receive  $995  cash.  The 
$5  is  really  an  interest  charge  for  the  use  of  the  money  30  days 
before  the  due  date  of  the  note.     The  entry  would  be  as  follows: 

Cash $995  - 

Interest  Cost 5  - 

Notes  Receivable $1,000  - 

Case  5.  Prepaying  an  Interest-Bearing  Note  Payable.  When 
a  note  payable  is  prepaid,  that  is,  paid  before  it  is  legally  due,  the 
interest  calculations  must  be  carefully  handled.  Suppose  that 
a  note  for  $1,000  due  in  90  days  with  interest  at  6%  is  paid  30 
days  before  its  due  date.  The  transaction  may  be  settled  by 
agreement  on  either  of  two  bases,  viz.,  (a)  the  accrued  value 
basis,  or  (b)  the  discounted  value  basis. 

(a)  A  creditor  willing  to  allow  prepayment  will  usually 
charge  the  interest  accrued  to  the  time  of  settlement.  In  this 
case  he  will  accept  $  1 ,000  in  payment  of  the  note  and  $  1  o— interest 
on  $1,000  for  60  days  at  6% — in  payment  of  the  interest.  The 
entry  will  be: 


INTEREST  26l 

Notes  Payable $1,000  - 

Interest  Cost 10  - 

Cash $1,010  - 

(b)  If,  as  a  matter  of  agreement,  the  creditor  should  be 
willing  to  accept  the  discounted  value  of  the  note — the  discount 
rate  being  6% — the  amount  to  be  paid  in  settlement  will  be 
determined  as  follows : 

Face  of  note $1 ,000  - 

Add  interest  for  90  da.  at  6% 15  - 

Amount  due  at  maturity $1,015  - 

Deduct  interest  for  30  da.  at  6%  (discount) .  .  5.08 

Proceeds — to  be  paid  in  full  settlement $1,009.92 

The  entries  will  be  as  follows : 

Interest  Cost $9.92 

Notes  Payable 1 ,000  - 

Cash $1,009.92 

Booking  Interest  Income.— The  entries  for  interest  on  notes 
receivable  are  similar  in  most  respects  to  those  for  notes  payable. 
When  a  note  receivable  without  interest  is  received,  it  is  the 
general  practice,  although  perhaps  not  quite  correct  theoreti- 
cally, to  enter  the  note  at  its  face  value.  A  note  due  in  60  days 
without  interest  is,  of  course,  not  worth  its  face  value  now. 
From  a  banker's  standpoint  it  is  worth  only  its  discounted  value. 
Thus,  $1,000  due  in  60  days  without  interest,  if  the  discount 
rate  at  the  bank  is  6%,  is  worth  only  $990.  However,  the  al- 
most universal  business  practice  is  to  record  it  at  its  face  value, 
disregarding  the  discount  necessary  to  determine  its  true  value. 
Where  a  business  man  accepts  a  non-interest-bearing  note,  he  is 
in  theory  making  to  his  customer  an  allowance  of  the  amount  of 
the  discount.  However,  as  he  usually  expects  to  keep  such  notes 
until  they  fall  due,  their  acceptance  really  represents  a  further 


262  FUNDAMENTALS  OF  ACCOUNTING 

extension  of  credit  to  the  customer  for  the  time  that  the  note  is 
to  run.  Banking  practice,  as  distinguished  from  business  prac- 
tice, almost  invariably  reckons  notes  at  their  true  or  discounted 
value. 

The  title  under  which  to  record  income  received  from  the  use 
of  money  lent  is  Interest  Income.  Sometimes  Interest  Earn- 
ings or  Interest  Revenue  is  used.  Several  illustrations  will  be 
given,  involving  different  situations. 

Case  i.  Purchasing  a  Note  Receivable  Without  Interest.  Sup- 
pose a  bank  buys  a  non-interest-bearing  note  for  $  1,000,  due  in  60 
days,  the  market  rate  of  interest  being  6%. 

Notes  Receivable $1 ,000  - 

Cash $990  - 

Interest  Income 10  - 

The  Interest  Income  account  is  a  liability  account  at  the  date 
of  making  this  entry,  but  its  status  changes  from  day  to  day  as 
the  bank  meets  the  liability  by  allowing  the  use  of  its  money,  so 
that  at  a  later  date  the  exact  status  of  the  account  can  be  deter- 
mined only  by  analyzing  it  to  see  how  much  of  the  original 
liability  still  exists  and  how  much  income  has  been  earned  to 
date. 

When  the  loan  matures  and  is  paid,  the  following  entry  will 
be  made:  \ 

Cash $1,000  - 

Notes  Receivable $!  000  _ 

At  this  date  the  Interest  Income  account  has  lost  all  of  its 
characteristics  as  a  liability  account,  and  records  only  an  increase 
in  capital  due  to  a  decrease  in  a  liability. 

Case  2.  Lending  Money  on  an  Interest-Bearing  Note  Receivable 
Retained  Until  Maturity.  Suppose  you  lent  Dennis  $1,000  on 
his  2  months'  note  at  6%.  You  would  make  the  following 
entry: 


INTEREST  263 

Notes  Receivable $1,000  - 

Cash $1 ,000  - 

At  the  time  the  loan  comes  due  and  is  paid  by  Dennis  you 
will  make  this  entry: 

Cash $1,010  - 

Notes  Receivable $1,000  - 

Interest  Income 10  - 

Here,  the  Interest  Income  account  is  a  pure  earning  or  income 
item,  as  it  indicates  the  increase  of  capital  due  to  allowing  the 
borrower  the  use  of  the  money  during  the  2  months'  period. 

Case  3.  Lending  on  a  Note  Receivable  with  Interest  Included  in 
the  Face  Amount.  If  a  60-day  note  is  received  in  payment  of  a 
$1,000  debt,  on  which  interest  is  to  be  calculated  at  the  rate  of 
6%,  it  might  be  made  out  in  two  ways,  either  an  interest-bearing 
note  for  $1,000  for  60  days  at  6%  amounting  at  its  due  date  to 
$1,010,  or  a  non-interest-bearing  note  for  $1,010  for  60  days. 
The  entry  to  record  the  latter  transaction  would  be : 

Notes  Receivable $1,010  - 

Customer $1,000  - 

Interest  Income 10  - 

At  this  point  the  student  should  pause  to  consider  from  the 
standpoint  of  the  three  fundamental  classes  of  accounts — assets, 
liabilities,  and  capital — the  nature  of  the  above  transaction.  The 
interest  income  at  the  time  it  is  recorded  has  not  been  earned. 
Day  by  day  as  time  goes  by  it  will  be  earned,  until  at  the  end  of 
the  60  days  it  will  be  fully  earned.  Therefore,  on  the  date  of  its 
record  on  the  books  the  interest  income  of  $10  is  in  the  nature  of 
a  liability.  Were  a  balance  sheet  to  be  drawn  up  on  the  day 
when  the  $10  interest  income  is  recorded  on  the  books,  that  item 
would  be  shown  among  the  liabilities  as  a  deferred  income  item. 

If  the  books  are  closed  some  time  after  the  original  entry  is 
made,  but  before  the  note  comes  due,  the  portion  of  the  income 


264  FUNDAMENTALS  OF  ACCOUNTING 

earned  to  the  date  of  the  balance  sheet  will  be  treated  as  an  in- 
crease in  capital,  while  the  portion  remaining  unearned  will  be 
shown  as  a  liability  under  the  head  of  Deferred  Income.  Ac- 
counting is  very  exacting  and  accurate  as  to  the  separation  of 
items  belonging  to  two  different  periods.  It  is  only  because,  as 
it  were,  the  business  is  brought  periodically  to  a  full  stop  and 
financial  condition  determined  on  that  date,  that  it  is  necessary 
to  make  these  nice  divisions  of  responsibility  or  liability  of  one 
period  to  another.  When  the  note  is  settled,  the  entry  is  as 
follows : 

Cash $1,010  - 

Notes  Receivable $1,010  - 

Case  4.  Buying  an  Interest-Bearing  Note  Receivable  Before 
Maturity.  The  note  may  be  bought  on  either  one  or  two  bases, 
viz.,  (a)  the  accrued  value  basis,  or  (b)  the  discounted  value 
basis. 

(a)  Suppose  you  bought  from  Richard  Smith  a  $1,000,  90- 
day,  6%  note,  30  days  before  it  is  due.  At  the  date  of  purchase 
it  would  have  60  days'  accrued  interest.  You  would  be  willing 
to  pay  $1,010  for  it,  buying  the  $10  accrued  interest  with  the 
note.     The  entries  to  record  the  transaction  would  be: 

Notes  Receivable $z  000  _ 

Accrued  Assets IO  _ 

Cash $1,010  - 

The  student  will  note  that  the  charge  for  the  accrued  interest 
is  made  not  to  the  Interest  account  but  to  the  Accrued  Assets 
account.  Such  a  transaction  is  often  spoken  of  as  the  "pur- 
chase" of  income.  This  Accrued  Assets  item  will  be  transferred 
—either  immediately  or  at  the  close  of  the  fiscal  period— to  the 
Interest  Income  account,  by  the  following  entry: 

Interest  Income *  Q  _ 

Accrued  Assets *IO  _ 


INTEREST  265 

When  this  note  falls  due,  you  will  collect  the  interest  for  the 
entire  90  days,  that  is,  you  will  receive  $15  interest.  Of  this  $15, 
however,  you  paid  at  the  time  you  received  the  note  $10  to  Rich- 
ard Smith  who  owned  the  note  for  60  days,  and  is,  therefore, 
entitled  to  the  interest  earned  during  that  time.  The  purchase 
of  Smith's  right  gives  you  the  right  to  receive  the  entire  amount 
of  interest  when  the  note  comes  due.  When  the  note  is  paid  at 
its  due  date  you  will  receive  $1,015.  Your  Interest  Income 
account  will  then  show  as  follows : 

Interest  Income 


Accrued  Assets $10-      Smith's  note $15- 

The  student  will  now  see  the  reason  for  transferring  Accrued 
Assets  to  the  Interest  Income  account  as  shown  above.  This 
$10  acts  as  an  adjustment  or  offset  to  the  $15  credit  which  will 
be  made  in  the  account  when  the  note  is  finally  paid.  The  In- 
terest Income  shows  that  income  to  you  for  the  30  days  which 
you  hold  the  note  is  $5.  In  making  the  debit  and  credit  analysis, 
therefore,  of  a  transaction  involving  the  receipt  of  an  interest- 
bearing  note  on  which  interest  has  accrued,  the  student  must 
look  forward  to  what  record  will  be  made  of  the  note  when  paid. 

(b)  If  Smith's  note  is  valued  on  a  discounted  basis,  the 
amount  you  will  pay  him  for  it  will  be  the  proceeds  as  usually 
calculated. 

Face  of  note $1,000  - 

Add  90  days'  interest 15  - 

Amount $1,015  - 

Less  30  days'  interest  (discount) 5.08 

Proceeds $1,009.92 

The  entries  for  recording  it,  will,  except  for  the  figures,  be 
the  same  as  in  (a)  above. 


266  FUNDAMENTALS  OF  ACCOUNTING 

Case  5.  Allowing  a  Customer  to  Prepay  His  Interest-Bearing 
Note.  Sometimes  it  is  advisable  to  permit  a  customer  to  pay 
his  note  before  maturity.  For  example :  Suppose  you  hold  Henry 
Jackson's  90-day  note  for  $1 ,000  with  interest  at  6%  and  Jackson 
offers  to  pay  the  note  30  days  before  maturity.  The  settlement 
is  usually  made  by  agreement  on  either  of  two  bases,  viz.,  (a) 
the  accrued  value  basis,  or  (b)  the  discounted  value  basis. 

(a)  According  to  the  accrued  value  basis,  the  entry  on  your 
books  would  be : 

Cash $1,010  - 

Notes  Receivable $1,000  - 

Interest  Income 10  - 

This  indicates  the  payment  of  the  face  of  the  note  $1,000  and 
60  days'  interest,  $10,  total,  $1,010. 

(b)  On  the  discounted  value  basis,  with  money  at  6%,  Jackson 
would  be  allowed  30  days'  discount  at  6%  on  $1,015.  In  this 
case  your  entry  would  be : 

Cash $1,009.92  - 

Notes  Receivable $x  000  _ 

Interest  Income 002 

Case  6.  Selling  an  Interest-Bearing  Note  Receivable.  Notes  re- 
ceivable from  customers  are  oftentimes  discounted,  i.e.,  sold,  at 
the  bank  to  raise  money  for  carrying  on  the  business.  Record- 
ing such  a  transaction  must  be  handled  with  care.  For  example : 
You  have  Silas  Brown's  6  months'  note  for  $2,400  dated  Septem- 
ber 10,  1919,  with  interest  at  5%  which  you  discount  at  the 
First  National  Bank  on  January  10,  1920,  at  6%.  Discount 
calculations  provide  the  following  data : 

(1)  Date  of  maturity  (Sept.  10,  1919  +  6  mo.)  =  Mar.  io,  1920. 

(2)  Term  of  discount  (Jan.  10,  to  Mar.  IO)  =  60  da.    (February  had  29 

da.  in  1920.) 

(3)  Interest  on  $2,400  at  5%  for  6  mo.  =  $60. 

(4)  Amount  (principal,  $2,400  +  int.,  $60)  =  $2,460. 


INTEREST  267 

(5)  Discount  on  $2,460  at  6%  for  60  da.  =  $24.60. 

(6)  Proceeds  (amount,  $2,460  —  dis.,  $24.60)  =  $2,435.40. 

There  are  several  different  ways  of  recording  this  transaction. 
For  the  present,  the  following  method  will  be  used : 

Cash $2,435.40  - 

Notes  Receivable $2,400  - 

Interest  Income 35-4o 

Questions 

1.  Define  "interest." 

2.  Why  is  it  now  considered  an  upright  practice  to  make  a  charge  for 
lending  money? 

3.  Compare  interest  and  rent. 

4.  What  is  the  idea  back  of  both  the  rent  and  interest  charges? 

5.  What  is  meant  by  "interest  cost"  or  "interest  expense"?     "In- 
terest income"? 

6.  What  effect  does  length  of  time  money  is  used  have  on  the  interest 
charge? 

7.  Explain  the  standard  method  of  stating  the  interest  charge. 

8.  When  does  the  interest  charge  usually  begin? 

9.  Explain  "legal  rate,"  "maximum  rate,"  "usury,"  as  applied  to 
interest. 

10.  Give  the  laws  of  your  state  in  regard  to  interest. 

11.  When  is  the  interest  usually  paid: 

(a)  If  money  is  borrowed  from  a  bank? 

(b)  If  money  is  borrowed  from  a  source  other  than  a  bank? 

12.  Does  interest  cost  paid  in  advance  indicate  an  increase  in  an  asset 
or  a  decrease  in  capital?    Explain. 

13.  When  closing  the  books  at  the  end  of  a  fiscal  period,  how  should 
you  handle  interest  cost  consumed?    Not  consumed? 

14.  When  interest  cost  is  paid  after  the  use  of  the  money  has  been 
enjoyed  for  a  given  time,  what  does  it  indicate?    Explain. 

15.  (a)  If  rent  is  paid  after  the  property  has  been  used,  what  does  it 
indicate? 

(b)  Compare  your  answer  to  Question  15  (a)  with  your  answer  to 
Question  14. 

16.  What  effect  does  paying  for  the  use  of  money  have  on  the  profits? 
Explain. 


268  FUNDAMENTALS  OF  ACCOUNTING 

17.  Interest  cost  from  the  standpoint  of  the  borrower  is  interest  income 
from  the  standpoint  of  the  lender  of  money.     Explain. 

18.  When  a  bank  is  paid  in  advance  for  lending  money,  what  does  its 
Interest  Income  account  indicate? 

19.  As  time  passes  what  change  takes  place  in  the  nature  of  the  Interest 
Income  account  in  Question  18?     Explain. 

20.  When  closing  the  books  at  the  end  of  a  fiscal  period,  how  should 
you  handle  interest  income  earned?     Not  earned? 

21.  Name  the  principal  sources  through  which  one  may  obtain  the  use 
of  other  people's  money. 

22.  Name  five  ordinary  methods  employed  in  obtaining  money. 

23.  How  is  the  date  of  maturity  of  notes  found  if  the  time  is  given  in 
months?     In  days? 

24.  Explain  an  easy  method  for  finding  the  due  date  if  the  time  is  30 
days,  or  even  multiples  of  30  days. 

25.  Explain  three  methods  of  finding  the  time  between  two  dates. 

26.  Explain  the  60-day  method  of  finding  the  interest. 

27.  Explain  how  to  use  this  method  when  the  rate  is  other  than  6%. 

28.  Explain  how  the  principle  involved  in  the  60-day  method  may  be 
applied  to  a  4%  rate?     5%  rate?    4)4%  rate?     8%  rate?     Any  rate? 

29.  Explain  "interchanging"  principal  and  time. 

30.  (a)  What  is  meant  by  "accurate  interest"? 

(b)  How  may  it  be  found  by  the  60-day  method? 

31.  How  is  the  amount  due  at  maturity  found? 

32.  Explain  fully  what  is  meant  by  "discounting  notes." 

33.  Name  and  explain  the  eight  expressions  used  in  solving  discount 
problems. 

34.  Is  interest  cost  always  booked  as  a  debit?     Explain. 

35.  Compare  bank  discount  with  interest  cost. 

36.  Explain  and  analyze  the  discounting  of  a  non-interest-bearing 
note  payable. 

37.  What  entries  are  made:  (a)  at  the  time  of  discount,  and  (b)  at 
the  time  of  payment  of  the  note?     Explain. 

38.  Explain  the  borrowing  of  money  on  an  interest-bearing  note  not 
discounted. 

39.  What  entries  are  made:  (a)  at  the  time  of  borrowing,  and  (b) 
at  the  time  of  payment  of  the  note?     Explain. 

40.  Explain  the  borrowing  of  money  on  a  non-interest-bearing  note 
having  interest  included  in  the  face  of  the  note. 

41.  What  entries  are  made:  (a)  at  the  time  of  borrowing,  and  (b) 
at  the  time  of  payment  of  the  note?    Explain  fully. 


INTEREST  269 

42.  Explain  the  borrowing  of  money  on  a  non-interest-bearing  note 
receivable. 

43-  What  entries  are  made:  (a)  when  the  note, is  received,  and  (b) 
when  the  note  is  discounted?    Explain. 

44.  Explain  the  method  of  calculating  the'  amount  to  be  paid  when 
settling  a  note  payable  before  it  becomes  due:  (a)  on  an  accrued  value 
basis,  and  (b)  on  a  discounted  value  basis. 

45.  What  entries  are  made:  (a)  in  the  case  of  Question  44  (a),  and  (b) 
in  the  case  of  Question  44(b). 

46.  Distinguish  between  the  face  and  true  value  of  a  non-interest- 
bearing  note  receivable  at  the  time  of  its  receipt. 

47.  When  a  business  man  accepts  a  non-interest-bearing  note  receiv- 
able is  he  really  extending  the  credit  term?    Discuss. 

48.  What  other  titles  are  used  for  interest  income? 

49.  Explain  the  purchase  of  a  non-interest-bearing  note  receivable. 

50.  What  entries  are  made:  (a)  at  time  of  purchase,  and  (b)  at  time 
the  loan  matures?    Explain. 

51.  Explain  the  loan  of  money  on  an  interest-bearing  note  to  be  re- 
tained until  maturity. 

52.  What  entries  are  made:  (a)  at  time  of  the  loan,  and  (b)  when  the 
loan  is  paid?    Explain. 

53.  Explain  the  loan  of  money  on  a  note  receivable  with  interest  in- 
cluded in  the  face. 

54.  What  entries  are  made:  (a)  when  the  note  is  received,  and  (b)  when 
it  is  paid?     Explain  fully. 

55.  Explain  the  purchase  of  an  interest-bearing  note  receivable  before 
maturity:  (a)  on  an  accrued  value  basis,  and  (b)  on  a  discounted  value 
basis. 

56.  What  entries  are  made:  (a)  for  Question  55(a),  and  (b)  for  Ques- 
tion 55  (b)?   Explain  fully. 

57.  Explain  how  to  find  the  amount  to  be  paid  by  a  customer  who  pays 
his  note  before  it  is  due:  (a)  on  an  accrued  value  basis,  and  (b)  on  a  dis- 
counted value  basis. 

58.  What  entries  are  made:  (a)  for  Question  57(a),  and  (b)  for  Question 
57(b)?    Explain. 

59.  Explain  discounting  an  interest-bearing  note  receivable. 

60.  What  entry  is  made  when  the  note  is  discounted? 

Problems 

1.  Find  the  interest  and  the  amount  due  at  maturity  in  each  of  the 
following : 


2J0 


FUNDAMENTALS  OF  ACCOUNTING 


Principal 

Time 

Rate 

I 

$    300- 

a 

60  da.  (2  mo.) 

q 

6       % 

2 

800- 

b 

90  da.  (3  mo.) 

r 

5 

3 

910.40 

c 

54  da. 

s 

4 

4 

385-I5 

d 

27  da. 

t 

7 

5 

2,904.12 

e 

81  da. 

u 

41/2 

6 

792.35 

f 

1  yr.  7  mo. 

V 

31/2 

7 

6,327.92 

g 

264  da. 

w 

8 

8 

150- 

h 

30  da.  (1  mo.) 

X 

71/2 

9 

536.50 

i 

19  da. 

y 

3 

IO 

72.25 

J 

120  da.  (4  mo.) 

z 

51/2 

Note:  1,000  problems  may  be  obtained  from  the  material  tabulated 
above.  For  example:  The  principal  in  No.  1,  $300,  may  be  used  in  con- 
nection with  time  (a)  for  each  of  the  10  rates  (q)  to  (z);  and  the  same 
principal,  $300,  may  be  used  with  time  (b)  for  each  of  the  rates  (q)  to  (z). 
This  may  be  continued  until  all  the  rates  (q)  to  (z)  have  been  used  with  all 
the  times  (a)  to  (j)  for  each  of  the  number  of  dollars  shown  in  the  Principal 
column.  The  solutions  should  be  numbered  "  1  aq,"  "  1  a  r,"  "ia  s,"  etc., 
until  z  has  been  used;  then  number  n  would  be  number  "1  b  q";  and  12 
would  be  "  1  b  r"  etc. 

2.  In  each  of  the  following  find  the  date  of  maturity,  interest,  amount, 
term  of  discount,  and  proceeds. 


Principal 

Date 

Time 

Interest 
Rate 

Date  of 
Discount 

Rate  of 
Discount 

I 

$    600- 

Jan.      5 

3  mo. 

no 

Mar.    6 

6% 

2 

450- 

Jan.    30 

6  mo. 

no 

May  31 

6 

3 

500- 

Mar.  10 

4  mo. 

6  % 

June  10 

6 

4 

376.25 

Apr.     6 

90  da. 

6 

June  16 

6 

5 

720.50 

Sept.  21 

2  mo. 

5 

Oct.    22 

6 

6 

1,200- 

Nov.    7 

60  da. 

7 

Dec.   16 

5 

7 

278.45 

June    8 

90  da. 

5 

Aug.     1 

6 

8 

592.75 

July    12 

120  da. 

•    41/2 

Aug.  14 

5 

9 

612.92 

Feb.     2 

9  mo. 

4 

May     5 

5 

10 

815.35 

Oct.    16 

75  da. 

6 

Nov.  20 

5 

INTEREST  271 

3.  Kenneth  Campbell  discounted  his  60-day  non-interest-bearing 
note  for  $500  at  the  First  National  Bank,  receiving  cash  therefor. 

(a)  Write  Campbell's  entry  when  the  note  was  discounted. 

(b)  When  the  note  was  paid. 

(c)  Write  the  bank's  entry  when  the  note  was  discounted. 

(d)  When  the  note  was  paid. 

4.  Paid  R.  S.  King  cash  for  your  60-day  interest-bearing  note  for 
$1,200  due  today. 

(a)  Write  your  journal  entry  at  date  of  payment. 

(b)  Write  King's  journal  entry  at  date  of  payment. 

5.  Frank  Malone  lent  D.  E.  Craig  $1,000  on  his  4  months'  note 
without  interest  for  $1,040. 

(a)  Give  Craig's  entry  when  he  issued  the  note. 

(b)  When  he  paid  the  note. 

(c)  Give  Malone's  entry  when  loan  was  made. 

(d)  When  he  received  payment  at  date  of  maturity. 

6.  You  own  George  Burke's  6  months'  note  for  $800  without  interest. 
You  discount  the  note  at  the  Second  National  Bank  3  months  before 
maturity  at  6%. 

(a)  Give  your  entry  when  the  note  was  discounted. 

(b)  Give  the  bank's  entry  when  the  note  was  discounted. 

7.  You  sold  to  the  Western  Bank,  C.  F.  Warner's  4  months'  $1,000 
note  with  interest  at  6%,  one  month  before  maturity;  discount  rate  6%; 
interest  $30;  amount  $1,020;  discount  $10.20;  proceeds  $1,009.80. 

(a)  Write  your  entry  when  the  note  was  discounted. 

(b)  Write  the  bank's  entry  when  the  note  was  discounted. 

(c)  Write  the  bank's  entry  when  the  note  was  paid. 

(d)  Write  Warner's  entry  when  he  paid  the  note  at  maturity. 

8.  Two  months  before  maturity  you  paid  John  Hardy  $3,263.04 
in  cash  for  your  6  months'  note  for  $3,200  with  interest  at  6%;  rate  of 
discount  6%;  interest  $96;  discount  $32.96. 

(a)  Write  your  entry  when  you  prepaid  your  note. 

(b)  Write  Hardy's  entry  at  the  time  of  prepayment. 

9.  Harry  Rice  sent  you  his  check  for  $61 5  in  payment  of  his  5  months' 
note  for  $600  with  interest  at  6%,  due  today. 

(a)  Write  your  entry  to  record  payment  of  the  note 

(b)  Write  Rice's  entry  at  the  date  of  payment. 


272  FUNDAMENTALS  OF  ACCOUNTING 

10.  You  received  from  John  Fox,  to  apply  on  account,  his  6o-day  note 
for  $1,000  without  interest.  You  allowed  him  the  discount  value  of  the 
note. 

(a)  Write  your  entry  at  the  date  you  received  the  note. 

(b)  Write  Fox's  entry  for  the  same  date. 

(c)  Write  your  entry  when  the  note  was  paid. 

ii.  May  3,  Charles  Duncan  sent  to  you  to  apply  on  account  a  90- 
day  interest-bearing  note  for  $800  dated  April  3,  signed  by  Benjamin 
Rowe.  You  agreed  to  take  the  note  at  its  face  value,  $800  plus  30  days' 
accrued  interest,  $4. 

(a)  Write  your  entry  on  May  3. 

(b)  Write  Duncan's  entry  on  May  3. 

(c)  Write  Rowe's  entry  on  July  3  when  he  paid  the  note. 

(d)  Write  your  entry  on  July  3  after  receiving  payment  for  the  note. 

(e)  Show  the  Interest  Income  account  on  your  books  on  July  3. 

12.  October  16  you  paid  James  Wagner  by  check  $398  for  your  $400, 
90-day  note  without  interest,  dated  August  1 7.  Wagner  agreed  to  accept 
the  discount  value  for  the  note. 

(a)  Write  your  entry  as  of  October  16. 

(b)  Write  Wagner's  entry  for  the  same  date. 

13.  October  23  you  discounted  at  the  United  Trust  Company,  Henry 
Anderson's  90-day  note  for  $1,200  with  interest  at  6%,  dated  August  14; 
interest  $18;  discount  $4.06;  proceeds  $1,213.94. 

(a)  Give  your  entry  on  October  23. 

(b)  Give  United  Trust  Company's  entry  on  October  23. 


CHAPTER  XVII 
DISCOUNTS— TRADE  AND   CASH 

Purpose  of  Chapter. — 

i.  Explanation  of  trade  discounts. 

2.  Origin  and  nature  of  cash  discounts. 

3.  Analysis  and  recording  of  sales  and  purchase  discounts. 

Definition  of  Discount. — A  discount  may  be  denned  as  a 
deduction  made  from  a  given  amount.  This  may  be  for  the  pur- 
pose of  determining  a  sales  price  or  the  settlement  price  of  a  bill 
or  open  account. 

Trade  Discounts. — Some  businesses  publish  catalogues  in 
which  a  list  price  is  set  up  for  each  commodity.  This  price  is  not, 
however,  the  sales  price,  which  is  determined  by  deducting  an 
amount  known  as  a  trade  discount.  For  example,  the  merchant 
may  list  a  commodity  at  $500,  but  allow  a  trade  discount  of  10%. 
The  price,  therefore,  at  which  he  will  sell  the  commodity  is  $450 
($500  less  $50,  10%  of  $500,  equals  $450).  The  custom  of  using 
trade  discounts  serves  several  purposes.  It  often  costs  a  great 
deal  to  issue  a  catalogue  giving  full  descriptions  and  prices  of  all 
commodities  handled  by  a  merchant.  Where  prices  change 
frequently,  the  cost  of  new  catalogues  to  announce  price  changes 
would  be  prohibitive.  Out  of  this  condition  grew  the  practice  of 
using  a  list  or  basic  price  in  the  catalogue  and  of  issuing  a  "dis- 
count sheet"  on  which,  by  means  of  a  reference  to  each  article 
by  catalogue  number,  was  scheduled  the  discount  allowed  in 
order  to  determine  the  selling  price.  The  cost  of  discount 
sheets,  containing  only  catalogue  numbers  and  discount  rates, 
is  so  small  comparatively  that  by  means  of  new  sheets  the  pur- 
18  273 


274  FUNDAMENTALS  OF  ACCOUNTING 

chaser  can  be  informed  of  price  changes  as  soon  as  they  occur, 
the  new  sheets  giving  new  discount  rates  which  indicate  the  new 
sales  price. 

It  was  formerly  considered  desirable  by  a  wholesaler  to  keep 
his  prices  secret  from  his  competitors.  The  use  of  a  list  price, 
which  without  the  discount  sheet  meant  nothing,  assisted  in  this. 

Trade  discounts  are  used  singly  or  in  series.  A  list  price  of 
S500  may  have  a  single  discount  of  10%;  another  list  price  of 
$750  may  have  a  discount  series  of  33  1/3%  and  10%;  while  a 
third  list  of  $900  might  have  a  series  of  30%,  10%,  and  5%.  The 
list  price  has  no  relation  to  the  sales  price,  the  discount  rate  or 
rates  being  the  essential  connecting  link.  Were  it  desired  to 
establish  a  sales  price  of  $100,  any  list  price  might  be  taken, 
provided  sufficient  discounts  were  allowed  to  bring  the  sales 
price  down  to  $100.  In  the  application  of  a  discount  series,  it  is 
the  practice  to  apply  each  discount  in  turn  to  the  reduced  price 
found  by  applying  the  previous  discount.  Thus,  when  the  list  is 
$100  and  the  discount  series  is,  say  20,  10,  and  10,  the  use  of  the 
first  discount  rate  of  20%  leaves  a  price  of  $80.  Deducting  10% 
of  this  leaves  $72.  The  final  10%  taken  from  this  leaves  a  price 
of  $64.80,  the  selling  price.  The  computation  may  be  made  by 
either  of  the  following  methods: 


Method  1 
$100    list  price 
.80    100%  less  20%  (1st  discount) 

$100 
.20 

Method  2 
Less 

Less 

$        80 
8 

$80.    1st  reduction 

$  20.00 

$        72 

.90    100%  less  10%  (2nd  discount) 

$100 
Less      20 

$  80 
.10 

.10 

$72.    2nd  reduction 

$     7-20 

.90    100%  less  10%  (3rd  discount) 
$64.80  3rd  reduction  and  sales  price 

$  72.00 
7.20 

$8.00 

$  64.80 

While  a  trade  discount  is  seldom,  if  ever,  entered  on  the  ac- 
count books,  it  is  customary  to  enter  it  on  the  sales  invoices. 


DISCOUNTS— TRADE  AND  CASH  275 

Here  the  list  price  is  first  set  up  and  the  discounts  deducted, 
giving  the  sales  price,  or  amount  for  which  the  customer  is 
charged.  This  latter  is  the  amount  entered  on  the  account  books. 
The  practice  of  indicating  sales  price  by  means  of  a  list  price  and 
discounts  is  not  universal,  some  trades  making  no  use  of  it. 

Cash  Discounts. — Cash  discount  is  a  deduction  allowed  at 
the  time  of  the  settlement  of  an  account,  that  is,  after  the  sale  has 
been  made,  and  not  before  the  determination  of  the  sales  price. 
It  is  common  in  some  lines  of  business  to  sell  goods  with  an 
optional  basis  for  payment.  Thus,  a  merchant  may  sell  goods 
for  $1,000  on  a  credit  term  of  30  days,  with  an  option  of  2%  off 
if  payment  is  made  within  10  days.  If  the  buyer  makes  payment 
any  time  within  10  days,  the  seller  will  accept  $980  ($1,000  less 
2%  of  $1,000  equals  $980)  in  full  settlement.  This  deduction 
allowed  for  settlement  of  a  debt  earlier  than  it  is  legally  due  is 
called  cash  discount. 

Since  cash  discount  on  sales  is  a  matter  of  agreement  between 
buyer  and  seller  and  depends  on  the  time  involved,  the  seller 
may  allow  the  discount  even  after  the  time  allowed  for  taking 
the  discount  has  elapsed.  For  example,  Allen  sells  $500  mer- 
chandise to  William  F.  Rogers  on  September  10,  1920,  terms 
2/10,  n/30.  On  September  22,  2  days  after  expiration  of  the 
discount  privilege,  Rogers  sends  his  check  for  $490  ($500  less 
2%).  According  to  the  agreement  Rogers  should  pay  $500,  i.e., 
although  he  has  paid  $490,  this  does  not  settle  the  debt,  because 
the  time  during  which  the  discount  was  allowed  has  passed. 
Whether  Allen  will  accept  the  $490  as  full  settlement  of  the  debt 
now  becomes  a  matter  of  business  policy.  Insistence  that 
Rogers  pay  the  full  $500  may  lose  him  Rogers'  trade,  whereas 
granting  him  the  additional  time  may  retain  it.  Abuse  of  the 
discount  privilege  is  becoming  a  serious  evil  in  some  trades,  and 
each  seller  must  decide  the  question  for  himself. 

As  mentioned  above,  trade  discount  is  a  deduction  allowed 
before  the  determination  of  the  sales  price  of  the  goods,  while 


276  FUNDAMENTALS  OF  ACCOUNTING 

cash  discount  is  a  deduction  that  is  allowed  after  the  deter- 
mination of  the  sales  price  and  has  for  its  purpose  the  securing  of 
the  settlement  of  the  debt  earlier  than  the  full  credit  term  agreed 
upon  by  buyer  and  seller. 

From  the  standpoint  of  the  seller  of  goods  the  cash  discount 
which  he  allows  for  early  settlement  of  the  debt  is  spoken  of  as 
sales  discount,  that  is,  a  discount  on  sales  made  by  him.  From 
the  standpoint  of  the  customer  or  purchaser  the  cash  discount 
which  he  is  allowed  is  spoken  of  as  a  purchase  discount  or  a 
discount  on  purchases. 

Basic  Nature  of  Sales  Discount. — Cash  discount  is  a  pecu- 
liarity of  trade  practice  in  the  United  States,  seldom  met  with 
elsewhere.  During  and  at  the  close  of  our  Civil  War,  financial 
conditions  were  bad  and  the  loss  from  uncollectible  accounts  was 
extremely  heavy.  In  a  great  many  instances  goods  had  to  be 
sold  on  long  credit,  because  merchants  were  not  able  to  pay  cash 
for  them  but  had  to  wait  until  the  goods  were  sold  to  make 
settlement.  The  sellers  of  goods  then  hit  upon  the  device  of 
allowing  a  discount  from  the  sales  price  to  those  buyers  who  could 
pay  in  a  shorter  time  than  the  full  credit  term  extended  to  most 
buyers.  The  seller  could  afford  to  do  this  because  by  receiving 
payment  of  a  debt  the  loss  from  uncollectible  accounts  was  ma- 
terially lessened.  The  sales  discount  is,  therefore,  in  the  nature  of 
an  allowance  made  for  cutting  down  this  loss  which  would  be 
incurred  were  the  account  allowed  to  run  the  full  credit  period. 
Every  business  man  knows  that  he  is  not  able  to  collect  all  of  his 
accounts.  He  knows  that  the  longer  the  account  runs,  the  longer 
it  becomes  past  due,  the  less  likely  is  he  to  collect  the  full  amount. 
He  may  lose  all  of  it.  Hence,  if  he  can  cut  down  the  amount  of 
this  loss  from  uncollectible  accounts  by  offering  as  an  induce- 
ment to  customers  a  slight  deduction  from  the  amount  of  their 
bills  if  they  will  make  payment  earlier  than  agreed  in  the  sales 
contract,  he  can  well  afford  to  do  so.  Furthermore,  he  secures 
the  use  of  his  funds  earlier  than  he  would  were  customers  to  take 


DISCOUNTS— TRADE  AND  CASH  277 

advantage  of  the  full  credit  term.  To  illustrate,  if  a  sale  of  goods 
for  $1,000  is  made  on  the  basis  of  a  credit  term  of  30  days,  with 
2%  off  if  payment  is  made  within  10  days,  the  seller  may  have 
to  wait  30  days  before  he  will  get  the  use  of  the  $1,000  due  him. 
If  the  customer  makes  payment  within  the  10  days,  the  merchant 
will  have  $980  to  use  20  days  earlier  than  he  would  have  had  the 
$1,000,  had  the  customer  elected  the  other  basis  of  settlement. 
The  $20  deduction  may  be  looked  upon  as  a  payment  made  or 
expense  incurred  by  the  merchant  for  two  purposes,  namely, 
(1)  the  prevention  of  loss  from  uncollectible  accounts,  and  (2), 
to  a  much  lesser  degree,  the  use  of  money  earlier  than  would 
be  possible  under  the  other  basis  of  settlement. 

Analysis  of  Sales  Discount. — When  charging  the  customer  at 
the  time  of  a  sale  on  an  optional  basis,  the  merchant  does  not  know 
which  basis  of  settlement  the  customer  will  select.  Accordingly, 
the  customer  is  charged  with  the  full  amount  as  determined  by 
the  regular  credit  period.  For  example,  in  the  case  used  above 
where  a  $1,000  bill  of  goods  is  sold  on  30  days'  credit  with  an 
optional  basis  of  settlement  of  2%  off  within  10  days,  the  charge 
to  the  customer's  account  would  be  $1 ,000.  If  the  customer  pays 
$1,000  at  the  end  of  30  days,  he  is  credited  with  $1,000  in  full 
settlement  of  his  account.  If,  however,  he  pays  $980  within  10 
days,  he  has  under  the  terms  of  the  contract  settled  his  account 
in  full,  and  his  account  must  also  be  credited  for  $1,000.  The 
cash  received  in  this  case  is  $980,  the  deduction  being  $20. 
Record  must  be  made  of  all  these  items  in  order  to  give  the  mer- 
chant full  information  as  to  what  took  place.  When  an  expense 
is  incurred  it  is  usually  settled  in  cash.  Settlement  by  means  of 
any  other  asset  is,  however,  equally  good.  Thus,  if  a  salesman 
wishes  to  receive  his  salary  in  merchandise  instead  of  in  cash,  the 
record  would  be  so  made.  This  would  in  no  way  change  the 
expense  record,  as  Salaries  account  would  still  be  charged.  In- 
stead of  crediting  Cash,  however,  the  Sales  account  would  be 
credited.    In  much  the  same  way,  if  a  merchant  incurs  an  expense 


278  FUNDAMENTALS  OF  ACCOUNTING 

in  the  elimination  of  uncollectible  accounts,  it  may  be  settled  by 
paying  either  cash  or  any  other  asset.  In  the  case  of  the  claim 
against  the  customer,  we  may  consider  a  portion  of  that  claim  to 
have  been  paid  back  to  the  customer,  that  is,  deducted  from  the 
claim  as  payment  for  the  elimination  of  the  risk  incurred  in 
carrying  the  account  for  the  full  credit  period.  It  is  as  if  the 
customer  had  paid  the  full  amount,  $1,000,  and  then  the  mer- 
chant had  returned  $20  as  payment  for  the  service  rendered  by 
early  payment.  Instead,  however,  of  the  transaction  taking 
place  in  exactly  that  way,  the  customer  pays  the  merchant  $980, 
retaining  $20  as  payment  for  the  service  rendered  in  making 
settlement  of  the  account  within  10  days  instead  of  allowing  it  to 
run  the  full  30  days. 

Recording  Sales  Discount. — The  original  record  of  sales  dis- 
count is  made  in  the  journal.  Other  methods  of  recording  it 
will  be  explained  later.  With  the  same  illustration  as  above,  the 
following  entry  will  be  made : 

Cash $98o  - 

Sales  Discount 20  - 

Henry  Brown $1,000  - 

In  posting  the  credit  to  the  customer's  account,  it  is  best  to 
post  the  $1,000  in  two  amounts,  $980  on  the  main  line  and  $20 
just  above  in  smaller  figures.  Bookkeepers  frequently  do  this 
in  order  to  show  in  the  account  that  the  customer  has  deducted 
his  discount.  Had  only  one  amount,  $1,000,  been  entered,  an 
inspection  of  the  account  would  not  show  whether  the  customer 
paid  his  bill  in  time  to  take  the  discount  or  waited  until  the  full 
credit  term  had  expired.  When  completely  posted,  the  account 
will  appear  as  follows: 

Henry  Brown 


19— 

Aug. 


2/10 


26 


1,000 


19— 
Aug. 


IS 


37 


980 


DISCOUNTS— TRADE  AND  CASH 


279 


Under  another  method,  the  $1,000  credit  is  posted  as  one  item 
and  the  $20  discount  is  entered  as  a  memorandum  in  the 
explanation  column,  as  follows: 

Henry  Brown 


19- 
Aug. 


2/10 


26 

1,000 

- 

19— 

Aug. 

IS 

2%,  $20      J 


37 


1,000 


Several  account  titles  are  used  to  record  sales  discount.  One 
finds  Discount  on  Sales,  Discounts  Allowed,  Discounts  Lost, 
Merchandise  Discount,  etc.  The  account  is,  of  course,  an  ex- 
pense account  and  at  the  close  of  the  fiscal  period  will  be  closed 
into  the  Profit  and  Loss  account.  In  showing  the  item  in  the 
formal  statement  of  profit  and  loss  it  will  be  included  under  the 
heading  Deductions  from  Income.  This  group  consists  of  all 
expenses  incurred  in  borrowing  or  obtaining  money,  such  as 
sales  discount  and  interest  cost.  The  form  for  this  is  shown  on 
page  282. 

Basic  Nature  of  Purchase  Discount. — A  sales  discount  from 
the  standpoint  of  the  seller  of  goods  is  from  the  standpoint  of  the 
purchaser  a  purchase  discount.  The  purchaser  accepts  the 
goods  on  two  options :  He  may  pay  the  gross  amount  at  the  end 
of  the  full  credit  term,  or  he  may  pay  a  less  amount  at  the  end  of 
a  shorter  time  and  receive  full  credit  for  payment  of  the  entire 
debt.  The  purchaser  of  the  goods  may  be  looked  upon  as  render- 
ing a  service  to  the  seller  whenever  he  makes  payment  earlier 
than  that  required  by  the  full  credit  term  of  the  agreement.  The 
seller  is  willing  to  pay  for  this  service  by  allowing  his  customer  to 
settle  the  debt  for  a  lesser  sum  than  its  face  amount,  because  it 
saves  him  the  risk  of  loss  from  uncollectible  accounts  entailed  by 
allowing  the  debt  to  run  the  full  time.  Purchase  discount,  there- 
fore, is  an  income  account  on  the  books  of  the  customer  indicating 
the  allowance  made  to  him  for  this  service.     If  the  customer,  in- 


280  FUNDAMENTALS  OF  ACCOUNTING 

stead  of  deducting  his  discount,  had  paid  the  gross  amount, 
$1,000,  and  had  received  in  return  $20  as  payment  for  the  service 
rendered,  the  true  nature  of  the  earning  would  be  more  apparent. 
The  fact  that  the  customer  when  making  payment  deducts  from 
the  face  of  the  bill  the  amount  due  him  does  not  alter  the  nature 
of  the  transaction. 

Analysis  of  Purchase  Discount. — -What  has  been  said  above 
concerning  the  fundamental  nature  of  the  purchase  discount 
transaction  gives  the  basis  for  making  its  debit  and  credit 
analysis. 

The  customer  settles  his  liability  to  the  seller  in  two  ways : 
(1)  A  portion  is  settled  by  cash  payment,  and  (2)  the  other  portion 
is  settled  by  rendering  a  service  for  which  the  creditor  makes  an 
allowance.  The  student  will  recognize  that  this  transaction  re- 
sults in  a  decrease  of  assets,  a  decrease  of  liabilities,  and  an 
increase  in  capital.  Case  4,  "Increases  in  Capital,"  Chapter  VI, 
page  56,  shows  this,  the  capital  increase  being  due  to  the  amount 
by  which  the  liabilities  decrease  more  than  the  assets.  This 
capital  increase,  now  in  the  creditor's  account,  must  be  transferred 
to  some  capital  account.  This  is  accomplished  by  debiting  the 
creditor's  account  and  crediting  the  income  account,  Purchase 
Discount. 

Recording  Purchase  Discount. — With  the  illustration  used 
above,  the  entry  on  the  journal  of  the  customer  will  be  as 
follows : 

Frank  Munson $1,000  - 

Cash $Q8o  - 

Purchase  Discount 20  - 

Other  methods  of  booking  purchase  discount  will  be  explained 
later.  Various  account  titles,  such  as  Discounts  on  Purchases, 
Discounts  Earned,  Discounts  Received,  etc.,  are  used.  The 
title,  Merchandise  Discount,  is  sometimes  used  for  both  sales 


DISCOUNTS— TRADE  AND  CASH  28 1 

and  purchase  discounts.  It  is  perhaps  better  to  use  a  title  in 
which  the  word  "purchase"  appears,  as  the  nature  of  the  trans- 
action is  then  apparent.  Since  the  Purchase  Discount  account 
is  an  income  account,  it  must  be  closed  into  the  Profit  and  Loss 
account  at  the  end  of  the  fiscal  period. 

The  journal  entry  which  would  be  made  for  this  transaction 
is  as  follows: 

Purchase  Discount $ 

Profit  and  Loss $ 


In  showing  the  item  in  the  profit  and  loss  statement  it  will  be 
included  under  the  section,  Other  Income. 

Financial  Management  Section  of  Profit  and  Loss  Statement. 

— After  subtracting  from  the  figure  of  gross  profit,  the  total  of  the 
operating  expense  groups,  the  item  of  Other  Income  will  be  added 
to  the  remainder  in  order  to  arrive  at  the  figure  of  total  income 
for  the  fiscal  period.  From  this  total  the  Deductions  from  In- 
come will  be  taken,  as  explained  on  page  282,  in  order  to  derive 
the  figure  of  Net  Profit. 

The  section  of  a  profit  and  loss  statement  which  is  shown 
on  page  282  indicates  the  form  in  which  items  of  Interest  Cost, 
Interest  Income,  Sales  Discount,  and  Purchase  Discount  are  set 
forth. 

Assume  that  the  Sales  were  $50,000  and  the  Cost  of  the  Goods 
Sold  was  $35,000,  then  the  Gross  Profit  on  Sales  is  $15,000;  from 
which  are  deducted  Operating  Expenses  of  $8,000,  leaving  Opera- 
ting Profit  of  $7,000.  The  name  "Operating  Profit"  instead  of 
"Net  Profit"  is  given  to  the  remainder  after  deducting  the 
Operating  Expenses  from  the  Gross  Profit  on  Sales,  because 
additional  increases  and  decreases  in  capital  occur  before  Net 
Profit  results.  If  the  Interest  Income  is  $47,  Interest  Cost  $30, 
Sales  Discount  $100,  and  Purchase  Discount  $103,  these  items 
will  be  set  up  in  the  profit  and  loss  statement  as  follows  only  the 
new  section  being  here  shown  in  detail : 


282 


FUNDAMENTALS  OF  ACCOUNTING 


Operating  Profit 

Additions  to  Income: 

Interest  Income. . 

Purchase  Discount . 


Total . 


Total  Income 

Deductions  from  Income: 

Interest  Cost 

Sales  Discount 


Total . 
Net  Profit . 


S  47 
103 


$  30 
100 


$7,000 


'7,i5o 


130 


•,020 


These  items  compose  the  financial  management  section  of  the 
profit  and  loss  statement  as  shown  above. 

Questions 

1.  What  do  you  understand  by  a  " discount"?    Illustrate. 

2.  What  is  a  list  price?     Of  what  use  is  it? 

3.  How  do  you  find  the  selling  price  when  the  catalogue  or  list  price 
is  known? 

4.  When  a  series  of  discounts  is  given,  how  do  you  calculate  the 
sales  price? 

5.  Distinguish   between    a    trade   discount   and   a   cash    discount. 
Illustrate. 

6.  (a)  What  is  the  basic  element  in  sales  discount? 

(b)  Explain  the  origin  of  the  cash  discount  practice. 

7.  What  other  element  besides  uncollectible  accounts  is  contained 
in  the  sales  discount  expense? 

8.  Is  cash  used  in  paying  for  the  sales  discount  expense?     Explain 
fully. 

9.  How  would  you  record  a  sales  discount  transaction?      Give  an 
example. 

10.  In  case  of  a  sales  discount,  how  is  the  credit  to  the  customer's 
account  posted? 

11.  Under  what  different  titles  is  a  sales  discount  recorded?     Which  is 
p  eferable? 


DISCOUNTS— TRADE  AND  CASH  283 

12.  What  is  a  purchase  discount?     Give  an  example. 

13.  Are  the  basic  elements  of  a  purchase  discount  the  same  as  those  of  a 
sales  discount? 

14.  Why  then  is  one  an  expense  and  the  other  an  income?  Explain 
fully  the  nature  of  the  income. 

15.  Is  the  purchase  discount  income  received  in  cash  or  in  some  other 
form  of  asset? 

16.  How  would  you  record  a  purchase  discount  transaction?  Give 
an  example. 

17.  Give  several  account  titles  for  purchase  discounts.  Which  is 
preferable? 

18.  What  journal  entry  is  necessary  to  close  Purchase  Discount  at 
the  end  of  the  fiscal  period? 

19.  Explain  fully  the  financial  management  section  of  the  profit  and 
loss  statement. 

20.  Prepare  a  financial  management  section  for  a  profit  and  loss  state- 
ment, supplying  the  items  and  figures. 

Problems 

1.  June  1,  19 — ,  M.  T.  Smith  sold  to  L.  M.  Pate  an  invoice  of  goods 
for  $500,  less  a  10%  trade  discount. 

(a)  What  was  the  cost  of  the  goods  to  Mr.  Pate? 

(b)  Give  Mr.  Pate's  journal  entry. 

(c)  Give  Mr.  Smith's  journal  entry. 

2.  August  30,  19 — ,  William  R.  Black  sold  merchandise  to  Lewis  F. 
Johnson  amounting  to  $2,000,  less  10%  trade  discount,  on  terms  2/10, 
n/30. 

(a)  Give  Black's  journal  entry  August  30. 

(b)  Give  Johnson's  journal  entry  August  30. 

.  (c)  What  amount  was  due  September  9,  19 — ?     September  29,  19 — ? 

(d)  Johnson  paid  the  bill  September  8.  Give  journal  entry  for  John- 
son.    For  Black. 

3.  An  automobile  was  listed  at  $1,800,  less  a  trade  discount  of  25%, 
10%,  and  5%. 

(a)  What  is  the  trade  price  of  the  car? 

(b)  The  series  of  discounts  are  equivalent  to  what  single  discount? 

4.  (a)  Journalize  the  following  transactions  made  by  Thomas  E. 
Watson,  Baltimore,  Md. : 


284 


FUNDAMENTALS  OF  ACCOUNTING 


June,  19—  !» 

1.     Paid  invoice  from  Strong  and  Company  for  $350,  less  2%  cash 

discount. 

4.  Purchased  merchandise  from   Wagner  and  Sons  amounting  to 

$200,  less  10%  trade  discount. 

5.  Paid  Pickering  Hardware  Company  on  their  invoice  of  May  26 

$500,  less  2%  cash  discount. 

6.  Sold  merchandise  to  J.  H.  Horner  amounting  to  $600,  less  12% 

trade  discount. 

(b)  Open  the  necessary  accounts  and  post  all  items. 

(c)  Close  the  Purchase  Discount  account  at  the  end  of  the  period. 

5.  (a)  Journalize   the  following   transactions   made   by   Harwood 
Chemical  Company,  Brooklyn,  N.  Y. 

August,  19 — 

1.     Sold  merchandise  to  Dorb  Drug  Company  amounting  to  $900,  less 
10%  trade  discount,  terms  2/10,  n/30. 

5.  Paid  New  York  Specialty  Company  $1,200,  less  2%  cash  dis- 

count. 

7.  Purchased  merchandise  from  Brooklyn  Sales  Company,  amount- 

ing to  $2,500,  less  15%  trade  discount,  terms  2/10,  n/60. 
10.    Received  cash  from  Dorb  Drug  Company  for  invoice  of  August  1 , 
less  discount. 

(b)  Open  the  necessary  accounts  and  post  all  items. 

(c)  Close  the  Sales  Discount  and  Purchase  Discount  accounts. 

6.  The  following  accounts  were  settled  according  to  the  highest  dis- 
count terms. 

(a)  Write  the  necessary  journal  entries  to  complete  each  of  the  ac- 
counts marked  X,  Y,  and  Z. 

(b)  Post  the  sales  and  purchase  discount  items  and  close  these  ac- 
counts. 


X 


Gilbert  Terhune 


19  — 

Sept 


2/10,  n/30  J 
2/10, 1/30,  n/ 60  J 
5/io, 3/30,  n/ 60  J 


7 

300 

0 

1,200 

- 

15 

465 

50 

DISCOUNTS— TRADE  AND  CASH 
Richard  Harper 


285 


19— 
Oct. 


1/30,  n/60 
2/10,  n/30  J 

4/15, 1/40,  n/60 J 
net  J 


10— 

18 

636 

15 

Oct. 

20 

27 

450 

- 

36 

384 

63 

40 

215 

84 

Ret'd  from  bill  of 
10/17  J 


30 


150 


Seth  B.  St.  John 


19— 
July 


Ret'd  from  in 
voice  7/3         J 


19— 

July 

3 

18 

500 

13 
18 

2  7 

5/10, 2/30,  n/60 J 
2/20,  n/30    J 

net      ■  J 

3/I5. 1/30,  n/60 J 


14 

3,000 

21 

4,400 

27 

970 

34 

2,530 

74 


7.  John  Anderson's  bookkeeper  began  making  the  profit  and  loss 
statement  for  the  year  ended  July  31,  19 — ,  but  did  not  complete  it. 
From  the  following  information  you  are  asked  to  complete  the  statement: 
Gross  Profit  on  Sales  $39,600;  Operating  Expenses  $8,460;  Sales  Discount 
$485;  Interest  Income  $160;  Purchase  Discount  $540;  Interest  Cost  $70. 

8.  A  section  of  a  trial  balance  contained  the  following: 


Sales  Discount .... 
Interest  Income . . . 

Expense 

Rent 

Salaries 

Interest  Cost 

Purchase  Discount .  .  ja  90 


Inventories:  Rent  paid  in  advance  $100;  expense  items  unconsumed 
$30;  salaries  of  clerk  accrued  $75. 

(a)  Set  up  in  skeleton  equation  form. 

(b)  Transfer  to  Profit  and  Loss  account  in  skeleton  form. 

(c)  Write  the  necessary  closing  journal  entries. 

(d)  Show  the  arrangement  of  the  items  in  the  profit  and  loss  state- 
ment. 


$340 

50 

$100 

74 

68 

300 

- 

743 

75 

52 

05 

278 

286  FUNDAMENTALS  OF  ACCOUNTING 

9- 

September,  19 — 

1.  Milton   Strong  began  business  with   the  following  assets  and 

liabilities:  cash  $3,000;  stock  of  merchandise  $4,000;  furniture 
and  fixtures  $1,200;  accounts  receivable  as  follows:  John  Atkin 
$240;  Charles  Willis  $150;  C.  E.  Keller  $200.  He  owed  on 
account  to  Frank  Allen,  $300;  Ralph  Hall  $400. 

2.  Paid  Home  Real  Estate  Company  by  check  $200  for  rent  of  store 

for  the  month. 

3.  Charles  Willis  sent  a  check  for  $147  in  full  payment  for  his  account 

of  the  1st,  $150,  less  2%  discount. 

4.  Sold  to  John  Atkin,  2/10,  n/30,  bill  of  merchandise  $1,200. 

5.  Bought  from  Frank  Allen,  2/10,  n/30,  invoice  of  merchandise  $200. 

6.  Paid  Ralph  Hall  by  check  $392  in  full  payment  for  account  owed 

him  on  the  1st,  $400,  less  2%  discount. 
8.     Received  from  C.  E.  Keller  check  in  full  of  his  account,  $200,  less 

3%- 
10.     Bought  from  Ralph  Hall,  3/ 10,  n/30,  invoice  of  merchandise  $500. 
12.     Sold  to  C.  E.  Keller,  2/10,  n/30,  merchandise  $1,500. 

14.  Received  check  from  John  Atkin  for  sale  of  the  4th,  less  2%. 

15.  Sent  Frank  Allen  check  for  invoice  of  the  5th,  less  2%. 
20.     Paid  cash  for  various  expenses,  $300. 

(a)  Journalize  above  transactions. 

(b)  Post  and  obtain  a  trial  balance. 

(c)  Prepare  a  balance  sheet  as  of  September  20. 

(d)  Prepare  a  profit  and  loss  statement,  for  the  20  days  ended  Sep- 
tember 20. 

(e)  Close  the  ledger  by  journal  entries. 

(f)  Prepare  post-closing  trial  balance. 
Additional  information  as  of  September  20: 

Merchandise  inventory $3,200 

Rent  paid  in  advance 65 

Expense  items  consumed 200 

Owed  to  William  Ross,  clerk,  for  salary 20 

10. 
March,  19 — 

1.  Harold  Hudson  began  business  with  the  following  assets  and  lia- 
bilities :  cash  $4,000 ;  merchandise $3 ,000 ;  accounts  against  Clyde 
Mullen$i,ooo,  andB.  A.  Butler  $800;  account  in  favor  of  Daniel 
Drew  $2,000;  notes  payable  $1,500,  in  favor  of  John  Adam 


DISCOUNTS— TRADE  AND  CASH  287 

dated  today  for  30  days  with  interest  at  6%;  furniture  and 

fixtures  $1,500.     Sold  merchandise,  $2,000  to  H.  R.  Bradford 

for  his  $2,000  note  dated  today,  with  interest  at  6%. 
2.     Sold  $1,200  in  merchandise  to  George  Chatfield,  terms  2/10,  n/30. 

Bought  from   Adam   Bede,   3/5,  n/30,   merchandise  $2,000. 

Received  check  from  Clyde  Mullen  in  full  for  his  account,  less 

2%. 
7.     Paid  Adam  Bede  by  check  $1,940  for  invoice  of  the  2d,  less  3%. 

Sold  to  Clyde  Mullen  merchandise  $1,400,  terms  2/20,  n/60. 
12.     Received  check  from  George  Chatfield  for  sale  of  the  2d,  less  2%. 
15.     Paid  Simpson  and  Company  in  cash  for  rent  of  store  for  one-half 

month  to  March  15,  $125. 
20.     B.  A.  Butler  gave  us  his  check  for  $776  in  full  of  account,  less  3%. 
22.     Paid  cash  for  miscellaneous  expenses  $400. 

27.     Received  check  from  Clyde  Mullen  for  sale  of  the  7th,  less  2%. 
31.     Gave  John  Adam  our  check  for  $1,507.50  in  payment  of  our  note 

of  the  1st,  $1,500  and  30  days'  interest  at  6%,  $7.50. 

(a)  Journalize. 

(b)  Post  and  obtain  a  trial  balance. 

(c)  Prepare  a  balance  sheet  as  of  March  31, 19 — . 

(d)  Prepare  a  profit  and  loss  statement. 

(e)  Close  the  ledger  by  journal  entries. 

(f)  Prepare  a  post-closing  trial  balance. 
Additional  information,  March  31,  19 — : 

Merchandise  inventory $1,700 

Expense  items  consumed 300 

Furniture  and  fixtures,  depreciation 1% 

Accruals  as  follows: 

Interest  on  Bradford's  note  for  30  days  at  6%. 

Rent  owed  to  Simpson  and  Company  for  1/2 
month  to  March  31 $125 

11.  (a)  Record  the  information  contained  in  the  following  trial  bal- 
ance in  ledger  form. 

(b)  Journalize  the  additional  transactions. 

(c)  Post  and  prepare  a  trial  balance. 

(d)  Prepare  a  balance  sheet  as  of  June  30,  19 — . 

(e)  Prepare  a  profit  and  loss  statement  for  the  6  months  ended  June 

30, 19— 

(f)  Write  adjusting  and  closing  journal  entries. 

(g)  Prepare  post-closing  trial  balance. 


288  FUNDAMENTALS  OF  ACCOUNTING 

F.  O.  Gaffney,  Trial  Balance,  May  31,  19- 


Cash 

Merchandise  Inventory  1/1/ — 

Notes  Receivable 

Alva  Barber 

Hugh  Mc  Vean 

Furniture  and  Fixtures 

Peter  Vincent 

Lucas  Smith  and  Company .  .  . 

Notes  Payable 

F.  O.  Gaffney,  Drawing 

F.  O.  Gaffney,  Capital 

Merchandise  Purchases 

Merchandise  Sales 

Rent 

Salaries 

Expense 

Sales  Discount 

Interest  Cost 

Interest  Income 

Purchase  Discount 


2,700 
2,000 
2,500 
240 
260 
1,000 


6,000 

250 
300 
170 
400 
90 


$16,120 


300 

700 

1,500 

6,000 

7,000 


120 
500 


$16,120 


Additional  transactions : 

June,  19 — 

1.  Sold  to  Alva  Barber,  2/10,  n/30,  bill  of  goods  $800.  Received 
check  from  Hugh  McVean  for  his  account,  $260,  less  3%. 

4.  Paid  Herman  Wright  for  my  2  months'  note  of  April  4  with  in- 
terest at  6%;  face  of  note  $500;  interest  $5. 

8.    Bought  merchandise,  on  account,  3/ 10,  n/30,  from  Peter  Vincent 


11.  Alva  Barber  sent  check  for  bill  of  the  1st,  less  2%.  Sold  mer- 
chandise for  cash  $400. 

14.  Proprietor  withdrew  for  personal  use  cash  $50,  and  merchandise 
$60. 

17.  Sent  Peter  Vincent  check  for  invoice  of  the  8th,  less  3%.  Paid 
Marvin  Safe  Company  cash  for  office  safe  $300. 


DISCOUNTS— TRADE  AND  CASH  289 

24.  Received  check  for  $1,010  from  Elmer  Ingalls  for  his  60-day 

note  of  April  25  for  $1,000  with  interest  at  6%,  due  today 

25.  Paid  cash  to  Kennedy  and  Company  for  stationery  and  supplies 

for  use  in  the  store  $35. 
30.     Received  from  Alva  Barber  his  30-day  note  with  interest  at  6% 
for  $100  to  apply  on  account.     Sold  merchandise  to  Hugh  Mc- 
Vean  $500,  terms  2/15,  n/30. 

Inventories,  etc.,  June  30,  19 — . 

Merchandise  on  hand $2,300 

Depreciation  of  furniture  and  fixtures 5%  for  the  6  months 

Expense,  supplies  on  hand $      50 

Accruals : 

Owed  to  Martin  Kelly  rent  for  1  mo.  to  June  30 $50 

Owed  to  Charles  White  for  services  as  clerk 60 

Interest  accumulated  on  notes  payable 20 

Interest  accumulated  on  notes  receivable 15 

12.  The  following  transactions  are  a  continuation  of  Problem  n  and 
illustrate  the  treatment  of  accruals  after  payment. 

July,  10— 

1.     Gave  Lucas  Smith  and  Company  our  30-day  note  with  interest 

at  6%  for  $500  to  apply  on  account. 
5.     Bought  $900  in  merchandise,  terms  3/15,  n/30,  from  Peter  Vin- 
cent.    Paid  Martin  Kelly  cash  for  rent  for  the  months  of  June, 
July,  and  August,  $150. 
8.     Sold  merchandise  $  1 ,  200,  terms  2/ 10,  n/30,  to  Alva  Barber. 
15.     Hugh.McVean  sent  check  for  sale  of  June  30,  $500,  less  2%. 
Paid  Charles  White  $75  in  cash  for  services  as  clerk  to  July  12. 
20.     Gave  Peter  Vincent  check  for  $873  in  payment  of  invoice  of  the 
5th,  less  3%.     Received  check  for  $1,176  from  Alva  Barber  for 
sale  of  the  8th,  less  2%. 
26.     Received  check  for  $1,522  from  Philip  Knox  in  payment  of  his 
note  $1,500  and  accumulated  interest  $22.    This  includes  the 
interest  accrued  on  notes  receivable  to  June  30. 

29.  Paid  John  Malone  $1,025  for  my  note  of  $1,000  due  today.    The 

$25  includes  the  interest  accrued  on  notes  payable  to  June  30. 

30.  Received  check  from  Alva  Barber  in  payment  for  his  30-day 

interest-bearing  note  dated  June  30. 

3 1 .  Paid  Lucas  Smith  and  Company  by  check  for  our  30-day  interest- 

bearing  note  of  July  1. 
19 


290  FUNDAMENTALS  OF  ACCOUNTING 

Additional  information  July  31,  19 — : 

Merchandise  on  hand $2,500 

Rent  paid  in  advance 50 

Owed  to  Charles  White  for  services  as  clerk 40 

(a)  Journalize  the  July  transactions. 

(b)  Post  and  obtain  a  trial  balance. 

(c)  Prepare  statements. 

(d)  Write  the  adjusting  and  closing  journal  entries. 

(e)  Prepare  post-closing  trial  balance. 


CHAPTER  XVIII 

LABOR-SAVING   METHODS— THE   PURCHASE 
JOURNAL 

Purpose  of  Chapter. — 

i.  Grouping  transactions  into  purchases,  sales,  and  cash. 

2.  Analysis  and  group  journalizing  of  purchases. 

3.  Forms  and  operation  of  purchase  journals. 

Grouping  Similar  Transactions. — When  recording  transac- 
tions, the  necessity  of  making  a  correct  debit  and  credit  analysis 
has  been  emphasized  in  order  properly  to  record  their  effect  upon 
assets,  liabilities,  and  capital.  This  is  a  fundamental  requirement 
of  good  accounting. 

The  student's  attention  is  now  called  to  a  different  kind  of 
analysis  or  grouping  of  business  transactions.  It  will  be  noticed 
that  they  can  be  grouped  into  classes  in  accordance  with  the  kind 
of  transaction  involved.  Here  the  basis  is  not  that  of  the  debit 
and  credit  analysis  of  the  transaction,  but  of  the  name  or  kind 
of  asset  involved  in  the  transaction.  There  are  many  different 
kinds  of  business,  and  the  bookkeeping  record  best  adapted  to 
one  business  may  not  be  at  all  suited  to  another  business.  What 
is  said  here  is  applicable  to  the  trading  business,  that  is,  retail  or 
wholesale  stores  as  distinguished  from  manufacturing  plants  and 
professional  businesses. 

In  the  trading  business  the  energies  of  the  proprietor  are  de- 
voted to  buying  and  selling  merchandise,  this  being  the  main 
activity.  Whatever  instrumentalities  help  to  bring  this  about 
must  have  the  careful  attention  of  the  owner  if  he  would  be  suc- 
cessful. His  business  must  be  so  organized  as  to  bring  about  the 
best  results.     He  will  have  a  highly  organized  delivery  depart- 

291 


292  FUNDAMENTALS  OF  ACCOUNTING 

ment  because  that  helps  his  sales;  he  will  have  a  well-developed 
credit  and  collection  department  so  that  he  may  know  to  whom 
he  can  extend  credit  without  undue  loss  from  uncollectible  ac- 
counts. He  will  maintain  an  efficient  buying  force  to  purchase 
his  stock-in-trade  in  the  best  markets  and  of  the  best  quality 
suited  to  his  needs. 

A  merchant  must  also  have  cash  or  credit  before  he  can  buy 
goods.  After  the  business  is  under  way  he  must  maintain  a 
continual  inflow  of  cash  in  order  to  meet  expenses  and  purchase 
more  stock.  Therefore  the  receipt  and  disbursement  of  cash 
constitute  a  large  and  important  phase  of  the  transactions  of  a 
business. 

It  is  thus  seen  that  the  majority  of  transactions  are  concerned 
with: 

i.  The  purchase  of  merchandise. 

2.  The  sale  of  merchandise. 

3.  The  receipt  of  cash. 

4.  The  expenditure  of  cash. 

The  Purchase  Transaction. — In  a  broad  sense  everything  a 
merchant  buys  may  be  called  a  " purchase."  He  must  buy  his 
store  equipment,  his  delivery  equipment,  and  the  services  of 
salesmen  and  clerks.  In  some  businesses  whatever  is  bought, 
whether  stock-in-trade,  real  estate,  machinery,  furniture  and  fix- 
tures, services  of  all  sorts,  the  rental  of  a  place  of  business,  the 
buying  of  insurance — everything  of  this  sort — is  spoken  of 
broadly  as  a  "purchase."  In  this  sense  all  of  these  transactions 
may  be  spoken  of  as  "purchase  transactions."  The  term  pur- 
chase will,  however,  be  restricted  here  to  the  buying  of  merchan- 
dise for  sale.  The  merchant  must  purchase  stock-in-trade  before 
he  can  begin  business,  and  practically  all  his  transactions  may 
be  said  to  be  concerned  primarily  with  the  buying  and  selling  of 
some  kind  of  commodity,  from  which  a  profit  arises. 

By  stock-in-trade  is  meant  the  merchandise  upon  the  sale 
of  which  the  main  endeavor  of  the  merchant  is  centered.     What 


THE  PURCHASE  JOURNAL  293 

constitutes  stock-in-trade  for  one  business  may  represent  some- 
thing entirely  different  in  another  business.  In  the  furniture 
business,  for  example,  stock-in-trade  may  be  office  furniture  of 
various  kinds.  In  the  dry-goods  business  whatever  office  furni- 
ture the  business  may  possess,  will  be  classed,  not  as  merchandise, 
but  as  office  furniture  and  fixtures.  The  student  must  therefore 
keep  clearly  in  mind  the  particular  kind  of  stock-in-trade  being 
dealt  in  by  a  given  business. 

A  clear  distinction  should  also  be  drawn  between  stock-in- 
trade  and  what  are  sometimes  called  "expense  supplies."  In 
every  business  supplies  of  various  kinds  are  bought  which  are 
necessary  for  the  efficient  conduct  of  the  business.  For  example, 
brooms,  dust-pans,  and  other  cleaning  agencies  must  be  pur- 
chased continually,  but  they  are  not  bought  for  sale  and  therefore 
should  never  be  classed  as  purchases  of  stock-in-trade.  The  same 
applies  to  postage  stamps,  stationery,  wrapping-paper,  twine, 
packing  boxes  and  cases,  and  similar  items.  All  such  items 
should  not  be  classed  as  purchases,  the  term  "purchase"  being 
limited  strictly  to  the  purchase  of  stock-in-trade. 

The  Purchase  Transaction  Analyzed. — No  matter  where  the 
merchant  may  secure  his  stock-in-trade,  whether  from  the  manu- 
facturer, wholesaler,  the  jobber,  or  even  at  an  auction-room,  if  the 
purchase  is  of  goods  for  sale,  it  will  be  classified  on  his  books  as  a 
purchase  transaction. 

Purchases  may  be  made  on  two  general  bases:  cash,  or  credit. 
In  the  case  of  of  a  cash  purchase,  the  transaction  involves  a 
simple  exchange  of  one  kind  of  asset  for  another.  So  far  as  the 
total  assets  are  concerned,  the  merchant  has  the  same  amount 
after  the  purchase  as  before.  The  form  of  his  assets  is,  however, 
different,  and  it  is  this  change  of  form  which  the  account  books 
must  reflect.  Instead  of  having  a  given  amount  of  cash  he  has 
less  cash,  but  more  merchandise.  In  the  case  of  stock-in-trade 
purchased  on  credit,  the  merchant  will  have  a  larger  amount  of 
assets,  because  he  has  not  given  any  asset  in  exchange  for  the 


294  FUNDAMENTALS  OF  ACCOUNTING 

stock-in-trade  purchased.  He  has,  however,  assumed  a  liability 
for  the  amount  of  his  purchase.  Thus,  while  the  assets  have  been 
increased  there  has  been  a  like  increase  in  the  liabilities,  and  the 
difference  between  total  assets  and  liabilities  will  therefore  remain 
exactly  the  same.  By  reference  to  the  fundamental  equation, 
Assets  -  Liabilities  =  Capital,  the  student  will  see  that  there 
has  been  no  change  of  capital  involved  in  the  purchase  either  for 
cash  or  on  credit. 

Journalizing  Transactions  by  Groups. — After  viewing  the 
average  run  of  transactions  in  a  business  for  a  few  days  or  weeks, 
the  student  will  realize  that  a  great  deal  of  effort  is  expended  in 
recording  many  similar  transactions,  and  that  much  time  can  be 
saved  by  sorting  the  transactions  during  a  given  day  and  waiting 
until  the  end  of  the  day  before  recording  them  on  his  account 
records.  Today  practically  every  business  is  organized  so  as  to 
make  this  sorting  easy. 

The  student  has  noticed  the  use  of  the  sales  ticket  whenever 
a  sale  is  made,  or  the  use  of  the  cash  register  by  means  of  which  a 
record  is  made  of  all  receipts  of  cash.  Similarly  there  are  tickets 
or  invoices  at  the  time  goods  are  received  or  purchased.  One  of 
the  chief  purposes  of  these  various  useful  devices  is  to  classify 
the  transactions  occurring  during  the  day.  After  sorting,  the 
debit  and  credit  record  of  a  group  can  be  made  by  one  entry  in- 
stead of  a  great  number  of  entries.  This  is  called  a  compound 
entry  because  it  is  composed  of  a  number  of  different  parts;  there 
are  a  number  of  debits  to  offset  one  or  more  credits. 

To  illustrate,  assume  that  the  following  purchases  of  goods 
have  occurred  during  a  day:  From  John  T.  Smith  $300;  from 
T.  J.  Jenkins  $500;  from  R.  W.  Watson  $750;  from  Jones  and 
Campbell  $1,000;  from  Eagle  Merchandise  Company  $250.  For 
each  of  these  the  debit  and  credit  analysis  should  be  a  debit  to 
Purchases  account  and  a  credit  to  the  seller  of  the  goods.  Were 
the  transactions  recorded  separately  there  would  be  five  separate 
entries,  as  follows : 


THE -PURCHASE  JOURNAL  295 

Purchases $    300  - 

John  T.  Smith $  300  - 

Purchases 500  - 

T.  J.  Jenkins 500  - 

Purchases 750  - 

R.  W.  Watson... 750  - 

Purchases 1 ,000  - 

Jones  and  Campbell 1,000  - 

Purchases 250  - 

Eagle  Merchandise  Company 250  - 

As  these  transactions  are  all  of  the  same  sort,  we  may  record 
them  by  setting  up  one  debit  to  Purchases  for  the  entire  amount 
and  showing  credits  to  each  of  the  individual  creditors,  as 
follows : 

Purchases $2,800  - 

John  T.  Smith $300  - 

T.  J.  Jenkins 500  - 

R.  W.  Watson 750  - 

Jones  and  Campbell 1,000  - 

Eagle  Merchandise  Company 250  - 

A  saving  has  been  made  not  only  in  the  amount  of  space  re- 
quired for  the  record,  but  also  in  the  fact  that  all  like  transactions 
have  been  thrown  together  in  a  group  for  debit  and  credit 
analysis. 

The  Purchase  Journal — Old  Form. — The  student  has  seen 
the  way  in  which  transactions  may  be  grouped  in  accordance  with 
the  nature  of  the  transaction.  He  should  appreciate  that  there 
is  a  distinct  labor-saving  in  this  use  of  the  compound  entry  to 
bring  on  the  books  a  whole  group  of  transactions.  It  is  carrying 
this  idea  one  degree  further  to  set  aside  a  special  book  for  the 
record  of  each  of  these  groups  of  transactions.  In  the  case  of 
purchases,  such  a  book  would  be  called  a  purchase  journal, 
and  absolutely  nothing  but  purchases  of  merchandise  would  be 
recorded  in  it.     Through  the  use  of  this  separate  purchase 


296  FUNDAMENTALS  OF  ACCOUNTING 

journal  it  will  no  longer  be  necessary  to  bring  onto  the  journal 
the  entries  for  this  group  of  transactions. 

Inasmuch  as  every  purchase  transaction  results  in  a  debit  to 
Purchases  and  a  credit  to  the  seller,  or  creditor,  the  debit  item 
may  readily  be  understood  and  so  need  not  be  stated  for  each 
purchase  since  nothing  but  purchase  transactions  are  recorded  in 
the  purchase  journal.  There  is  therefore  no  need  of  repeating 
the  debit  each  time  the  record  of  a  transaction  is  made.  This 
is  spoken  of  as  a  short-hand  or  abbreviated  method,  where  one  of 
the  items  of  the  transaction  is  suppressed,  but  can  always  be 
readily  implied  from  the  name  of  the  journal  in  which  the  trans- 
actions are  recorded.  The  practice  is,  however,  to  bring  the  un- 
stated items  formally  onto  the  journal  (i.e.,  the  journal  entry  is 
corripleted)  at  the  time  the  full  record  is  transferred  to  the 
ledger. 

The  Purchase  Journal  Record. — The  purchase  journal,  Form 
7(a),  is  merely  a  device  for  making  a  group  entry.  It  has  a  more 
or  less  standardized  form  and  some  peculiarities  as  to  its  use,  but 
fundamentally  it  is  a  labor-saving  device. 

In  its  simple  form  it  does  not  differ  as  to  rulings  from  the 
journal  with  which  the  student  is  already  familiar.  In  the  use 
made  of  the  columns  there  are  some  differences  to  be  noted, 
however. 

The  two  columns  on  the  extreme  left  are  the  date  columns. 
The  wide  column  is  used  for  a  showing  o  f  the  debi  t  and  credit  items. 
The  method  used  in  the  general  journal  whereby  the  debits  and 
credits  are  shown  through  the  use  of  margins  is  not  followed  here. 
Margins  have  no  meaning  in  the  purchase  journal.  The  name 
of  the  creditor  is  set  up  first,  close  against  the  date  column,  fol- 
lowed by  whatever  explanatory  matter  may  be  deemed  neces- 
sary, usually  the  address  or  terms.  The  first  money  column  is 
used  as  an  item  or  detail  column,  the  second  money  column  in- 
dicating the  total  amount  of  the  purchase  transaction.  The 
ledger  folio  column  has  the  same  use  as  in  all  other  journals, 


THE  PURCHASE  JOURNAL  297 

namely,  that  of  a  cross-index  between  the  journal  and  the 
ledger. 

Reference  to  Form  7(a)  on  page  299  will  make  this  clear. 
Stated  in  another  way,  the  credit  of  each  transaction  is  set  up  as 
the  transaction  occurs,  the  debit  being  held  in  suspense  until 
such  time  as  it  is  deemed  necessary  to  show  it.  At  that  time  the 
debit  to  Purchases  is  set  up,  the  amount  being  the  total  of  all  the 
credits  previously  set  up.  It  will  thus  be  seen  that  the  principle 
of  the  group  entry  has  been  followed,  although  the  manner  of 
making  the  actual  entry  differs  somewhat  from  that  shown 
above. 

The  student  must  keep  clearly  in  mind  two  things  with  regard 
to  entries  on  the  purchase  journal:  (1)  When  making  day-to-day 
entries  only  the  credit  of  each  transaction  is  set  up.  (2)  At  the 
close  of  the  month,  or  week,  the  debit  side  of  all  of  the  month's 
credit  entries  is  set  up,  the  amount  being  the  sum  total  of  the 
credits.  The  purchase  journal  is  therefore,  when  completely 
written  up,  as  much  of  a  debit  and  credit  journal  as  any  other 
journal.  Of  course,  the  debit  and  credit  equilibrium  of  all  journals 
is  a  fundamental  of  bookkeeping. 

To  illustrate  the  form  and  use  of  the  purchase  journal,  the 
following  transactions  will  be  shown,  first,  as  they  would  be  re- 
corded in  the  general  journal,  and,  second,  as  they  would  be 
recorded  in  the  purchase  journal. 

Purchases  were  made  by  an  auto  sales  agency  during  the 
month  of  February,  19 — ,  as  follows: 

February    1.    Johnson,  Brown  Company: 

2  Model  M  touring  cars  at  $3,000  each. 
1  Truck  $5,000,  terms  of  sale  being  2%  off  from  the  billed 
price  if  payment  is  made  within  10  days,  but  the  full 
or  net  amount  must  be  paid  within  30  days  (these 
terms  of  sale  are  usually  written  as  follows:  2/10, 
n/30). 
Brackett  and  Hough: 

Auto  repair  parts,  $1,000,  terms  of  sale  being  60  days 
credit  (expressed  as  net  60,  i.e.,  n/60). 


298 


FUNDAMENTALS  OF  ACCOUNTING 


3.     The  Big  4  Truck  Company 

1  Model  A  truck  $3,000. 

2  Model  C  trucks  at  $4,000  each,  the  terms  of  sale,  net 
10  days. 

29.     The  Locomotive  Company: 
1  Sedan  $2,500. 

1  Touring  car,  5-passenger,  $2,000. 

2  Trucks  at  $3,500  each,  terms  2/10,  n/30. 

Journal  without  explanations: 


February  1,  19 — 

(Page  . 

11) 

Merchandise  Purchases 

14 

11,000 

_ 

Johnson,  Brown  Co. 

1 1 ,000 

- 

Merchandise  Purchases 

14 

1. 000 

_ 

Brackett  &  Hough 

1,000 

- 

3 

(Page  27) 

Merchandise  Purchases 

14 

1 1 ,000 

- 

The  Big  4  Truck  Co. 

1 1 ,000 

- 

29 

(Page  42) 

Merchandise  Purchases 

14 

11,500 

- 

The  Locomotive  Co. 

11,500 

- 

When  the  general  journal  is  used,  the  Purchases  account, 
after  posting,  will  show  each  purchase  recorded  in  the  following 
manner: 


19— 
Feb. 


Merchandise  Purchases 


(Page  14) 


21 

II,000 

2  r 

1,000 

- 

?7 

1 1 ,000 

- 

4-1 

11,500 

- 

THE  PURCHASE  JOURNAL 
Purchase  Journal 


299 


19- 
Feb. 


29 


2D 


Johnson,  Brown  Co.,  Flint,  Mich.,  2/10 
n/30: 
2  Model  M  Touring  Cars  @       $3,000 
1  Truck 

Brackett  &  Hough,  Chicago,  111.,  n/60: 
Auto  repair  parts 

TheBig4.Truck  Co.,  Detroit,  Mich.,  n/ 10 

1  Model  A  Truck 

2  "     C  Trucks  @  $4,000 

The  Locomotive  Co.,  Phila.,  Pa.,  2/10, 
n/30: 
1  Sedan 

1  Touring  5-passenger 

2  Trucks  @  $3,500 

Merchandise  Purchases,  Dr. 


23 


25 


14 


6.000 
5.000 


3.000 
8.000 


2,500 
2,000 
7,000 


1,000 


1 1 ,000 


11,500 


34,5oo 


Form  7.  (a)  Purchase  Journal— Old  Form 


Comments.  Note  that  the  terms  of  purchase,  as  in  the  pur- 
chase from  the  Johnson,  Brown  Company,  immediately  follow 
the  name  of  the  creditor  on  the  same  line,  while  the  other  ex- 
planatory matter  is  shown  on  the  following  lines,  a  uniform 
margin  being  maintained.  The  first  money  column  shows  the 
detailed  amounts,  while  the  second  money  column  shows  the 
total.  The  money  columns  do  not  have  the  debit  and  credit 
significance  that  attaches  to  them  in  the  general  journal.  At  the 
close  of  the  month  when  the  debit  item,  Merchandise  Purchases, 
is  set  up  it  is  customary  to  write  the  term  "Dr."  after  "Merchan- 
dise Purchases"  because  in  this  journal  the  distinction  between 
the  debit  and  the  credit  elements  is  not  made  by  means  of 
margins. 

Note  carefully  the  way  in  which  the  purchase  journal  is  ruled. 


300  FUNDAMENTALS  OF  ACCOUNTING 

The  total  amount  for  each  purchase  is  extended  on  the  line  of  the 
last  item  shown  in  the  detail  column.  At  the  close  of  the  month 
the  single  line  indicating  totals  extends  across  both  money 
columns,  while  the  double  lines  which  indicate  the  separation  of 
the  February  transactions  from  those  of  the  following  month 
extend  through  the  date  columns,  ledger  folio,  and  the  two  money 
columns.  The  student  should  learn  these  matters  of  form  as 
rapidly  as  possible. 

Posting  the  Purchase  Journal. — In  order  to  have  the  accounts 
with  creditors  show  the  true  status  of  all  claims  against  the  busi- 
ness at  all  times,  transactions  with  these  creditors  must  be 
entered  in  their  respective  accounts  as  soon  as  possible  after  they 
take  place.  It  therefore  becomes  necessary  to  post  the  purchase 
journal  daily.  Inasmuch,  however,  as  only  the  credit  side  of 
each  transaction  is  shown  at  the  time  of  the  transaction — the 
debit  item  being  suppressed  until  the  end  of  the  month — only 
the  credit  items  will  be  posted  from  day  to  day  from  the  purchase 
journal. 

This  brings  about  a  lack  of  equilibrium  in  the  ledger  because 
until  the  debit  item  has  been  posted  a  trial  balance  could  not  be 
taken.  At  the  end  of  the  month,  however,  when  the  debit  is 
posted  to  Merchandise  Purchases,  the  ledger  will  be  brought  into 
equilibrium. 

In  making  these  journal  postings  the  folio  reference  to 
show  the  ledger  page  on  which  the  account  appears  should  be 
entered  in  the  purchase  journal.  In  the  ledger  account  there 
will  be  shown  in  the  folio  column  for  each  item  the  letter  "P" 
and  the  page  number  of  the  purchase  journal  from  which  the 
item  has  been  transferred. 

When  the  purchase  journal  is  used  the  Merchandise  Purchases 
account  will  show  in  one  amount  the  total  of  the  purchases 
for  the  week  or  month  instead  of  the  individual  items.  The 
student  should  note  the  change  from  J  to  P  in  the  initial  of  the 
book  of  original  entry. 


THE  PURCHASE  JOURNAL 
Merchandise  Purchases 


301 

(Page  14) 


19— 

Feb. 

29 

P 

1 

34,5oo 

- 

Johnson,  B 

ROWN  CO. 

(Page   22) 

19— 

Feb. 

1 

P 

1 

1 1 ,000 

_ 

Brackett  &  Hough 

(Page   23) 

19— 
Feb. 

1 

P 

1 

1,000 

_ 

The  Big  4  Truck  Co. 

(Page   24) 

19— 
Feb. 

3 

P 

1 

1 1 ,000 

•_ 

The  Locomotive  Co. 

(Page   25) 

19— 
Feb. 

29 

P 

1 

11,500 

_ 

Purchase  Journal — New  Form. — In  another  form  of  purchase 
journal  (see  Form  7(b))  all  reference  to  the  articles  purchased  is 
omitted.  This  condenses  the  record  and  results  in  a  great  saving 
of  time  and  space.  It  is  advisable  to  number  each  invoice  con- 
secutively and  enter  this  number  in  the  purchase  journal,  after 
which  the  invoice  may  be  filed  numerically  or  alphabetically. 


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Form  7.  (b)  Purchase  Journal — New  Form 

The  standard  journal  ruling  can  be  adapted  to  this  type  of 
purchase  journal  by  entering  the  amount  of  the  invoice  in  the 


302 


FUNDAMENTALS  OF  ACCOUNTING 


last  money  column  and  writing  the  headings  as  indicated.  The 
folio  column  occupies  the  cents  column  of  the  left  money  column, 
the  rest  of  which  together  with  the  regular  folio  column  comprises 
the  terms  column. 

Volume  of  Business  Done  with  Each  Creditor. — In  the  case 
of  a  cash  purchase  of  merchandise  the  debit  and  credit  analysis 
results  in  a  debit  to  Purchases  account  and  a  credit  to  Cash  ac- 
count. It  is  desirable  in  some  businesses,  for  the  purpose  of 
securing  full  information  concerning  the  volume  of  business  done 
with  a  given  creditor,  to  set  up  on  the  books  an  account  with 
every  creditor  for  merchandise  bought,  whether  payment  is  made 
immediately  in  cash  or  at  a  future  date.  Therefore,  for  the  sake 
of  establishing  thoroughly  the  underlying  principles,  we  shall  in 
the  examples  given  show  the  creditor's  account  even  though  it 
may  be  settled  immediately  by  the  payment  of  cash.  This 
method  of  recording  purchases  is  not  a  universal  practice,  how- 
ever. Assume  that  a  purchase  from  John  B.  Garvin  was  made 
for  cash.  A  full  general  journal  entry  setting  up  Garvin's  account 
would  be  as  follows : 


June  10.  19- 


Merchandise  Purchases 
John  B.  Garvin.  .  .  . 


S3, 000 


This  will  be  immediately  followed  by  the  next  entry 


June  10.  19- 


John  B.  Garvin. 
Cash 


;,ooo 


5,000 


Garvin's  account  in  the  ledger  would  appear  as  follows: 
John  B.  Garvin 


19  — 
June 


3.000 


19— 
June 


J    6 


3,000 


THE  PURCHASE  JOURNAL  303 

As  Garvin's  account  has  been  both  credited  and  debited  with 
the  same  amount,  there  is  no  balance  in  it.  Being  on  the  books, 
however,  it  will  indicate  to  the  merchant  the  volume  of  business 
he  has  done  with  Garvin.  The  net  effect  of  the  two  entries  has 
been  to  debit  Purchases  and  credit  Cash,  just  as  if  the  transaction 
had  been  originally  entered  as : 

Merchandise  Purchases $3,000  - 

Cash $3,000  - 

While  this  latter  method  saves  time,  the  longer  method  con- 
sisting of  the  two  entries  is  the  one  which  will  be  followed  in  the 
future.  The  first  of  the  two  entries  required  by  the  longer 
method  will  not,  however,  be  made  exactly  as  shown  in  the  above 
explanation.  Instead  of  entering  in  the  general  journal  the  debit 
to  Merchandise  Purchases  and  the  credit  to  the  seller — in  this 
case  John  B.  Garvin — the  transaction  will  be  recorded  in  the 
purchase  journal,  which  provides  the  debit  to  Purchases  and  the 
credits  to  the  individual  creditors'  accounts.  The  second  entry — 
the  debit  to  the  seller  and  the  credit  to  Cash — whether  made  at  a 
future  date  or  at  the  time  of  purchase,  will,  of  course,  be  made  in 
the  general  journal,  just  as  shown  in  the  example. 

Advantages  of  the  Purchase  Journal. — Some  advantages 
must  result  from  the  use  of  special  journals,  otherwise  they  would 
not  form  part  of  the  accounting  system.  The  advantages  of  the 
purchase  journal  are  summarized  below. 

1 .  Great  saving  of  time  and  space  in  recording,  all  purchases 

being  entered  in  condensed  form,  one  line  to  each 
purchase. 

2.  Only  one  more  than  half  the  former  number  of  postings 

required,  one  posting  being  made  for  the  total  debits 
for  a  week  or  a  month. 

3.  Less  chance  of  errors  in  posting,  since  fewer  items  are 

transferred. 


304  FUNDAMENTALS  OF  ACCOUNTING 

4.  Much  space  saved  in  the  Purchase  account  in  the  ledger, 

as  twelve  postings  may  be  sufficient  for  a  year's  work 
where  formerly  hundreds  of  debits  were  necessary. 

5.  Assists  in  the  subdivision  of  labor.     Two  persons  can 

work  at  the  same  time — one  in  the  general  journal  and 
another  in  the  purchase  journal. 

6.  More  convenient  to  obtain  information  in  regard  to  a 

particular  purchase,  especially  if  entered  numerically, 
because  all  purchases  are  in  one  journal. 

Questions 

1.  What  is  meant  by  the  "analysis  "  of  a  business  transaction? 

2.  Name  the  four  important  groups  into  which  the  transactions  of  a 
trading  business  may  be  divided. 

3.  Explain  the  meaning  of  "purchase"  in  the  broad  sense. 

4.  What  is  meant  by  "stock-in-trade"? 

5.  How  do  you  determine  whether  a  purchase  is  stock-in-trade  or  an 
expense  item? 

6.  What  is  meant  by  "journalizing  transactions  by  groups"? 

7.  What  is  a  "purchase  journal"? 

8.  (a)  Which  item  is  suppressed  in  a  day-to-day  record  of  trans- 
actions in  a  purchase  journal?    Why? 

(b)  When  is  the  journal  entry  completed?     How? 

9.  Give  the  rulings  of  the  first  form  of  purchase  journal. 

10.  Explain  the  use  of  the  money  columns  of  the  purchase  journal. 

11.  (a)  How  is  a  purchase  journal  summarized? 

(b)  How  is  it  ruled  up  or  closed  at  the  end  of  the  month? 

12.  (a)  Explain  the  posting  from  a  purchase  journal. 

(b)  When  are  the  credit  items  posted?    The  debit  items? 

13.  Should  a  purchase  of  furniture  for  use  in  the  office  be  entered  in 
the  purchase  journal?     Why? 

14.  Give  the  ruling  for  the  second  form  of  purchase  journal. 

15.  How  may  the  standard  form  of  journal  ruling  be  adapted  to  use 
for  this  journal? 

16.  How  may  full  information  concerning  the  volume  of  business  done 
with  each  creditor  be  obtained? 

17.  Why  is  it  desirable  to  make  two  entries  for  a  cash  purchase  when 
the  purchase  journal  is  used? 

18.  State  the  advantages  of  using  a  purchase  journal. 


THE  PURCHASE  JOURNAL  305 

Problems 

i.  (a)  On  a  sheet  of  journal  paper  write  up  a  purchase  journal  for  the 
following  transactions  of  a  wholesale  grain  business. 

June,  19 — 

3.     Bought  from  Albers  Brothers  Milling  Company  20  bu.  wheat  at 

$1.75,  terms  2/10,  n/30. 
5.     Bought  from  Armour  Grain  Company,  10  bu.  oats  at  51c,  terms 
2/10,  n/30. 
12.     Bought  from  Merchants  Grain  Company  75  bu.  corn  at  85c, 

terms  n/60. 
15.    Bought  from  Armour  Grain  Company  10  bu.  barley  at  90c,  200 
bu.  wheat  at  $1.70,  terms  n/30. 

(b)  Summarize  and  rule  the  purchase  journal. 

(c)  Using  one-half  sheet  of  ledger  paper,  post  the  purchase  journal. 

2.     (a)  Record  the  following  transactions  in  a  purchase  journal  for  a 
grocery  business. 

July,  19— 

1.     Bought  from  Reese  Brothers,  on  account: 
50  lb.  Singapore  pepper  at  13c. 
1,000  "  fine  granulated  sugar  at  5c. 
100  "  Japan  tea  at  20c, 
100  "  Hyson  tea,  at  30c. 
3.     Bought  from  Kent  Grocery  Stores,  terms  2/10,  n/30: 
500  lb.  sugar  at  5c. 
100  "  7  Rio  coffee  at  7c. 
7.     Bought  from  Overbeck  Brothers- for  cash: 
25  lb.  tobacco  at  18c.        .  '• 
26.     Bought  from  Jewell  Grocery  Company,  terms  2/10,  n/30: 
1,000  lb.  sugar  at  5^c. 
300  "  7  Rio  coffee  at  8c. 
50  "  tea  at  25c. 
31.     Bought  from  R.  M.  Nelson  30  doz.  eggs  at  27c,  terms  n/60. 

(b)  Summarize  the  purchase  journal. 

(c)  Open    the    necessary    accounts    and    post    from   the    purchase 
journal. 

3.     (a)  Record  the  following  transactions  for  a  jewelry  business.    Use 
a  general  journal  and  a  purchase  journal. 


306  FUNDAMENTALS  OF  ACCOUNTING 

October,  19 — 

5.     Bought  from  Lieberman  and  Friedman,  terms  n/30: 
10  Brooches  at  $50  each. 
10  Brooches  at  $15  each. 
20  Bracelets  at  $20  each. 
15  Diamond  stones  at  $195  each. 
12  Lavalieres  at  $35  each. 
7.     Bought  from  Palmer  Jewelry  Company,  terms   n/10,  3    doz. 
watches  of  various  kinds,  total  bill  $1 ,400. 

15.  Bought  from  Carpenter  Brothers,  on  account,  furniture  and 

fixtures  for  office  use  $1,200. 

26.  Bought  from  Forest  and  Giles,  for  cash,  boxes  and  wrapping 

material  for  store  use  $225. 

27.  Bought  from  Palmer  Jewelry  Company  a  bill  of  merchandise 

amounting  to  $2,200,  terms  2/10,  n/30. 
31.    Bought  postage  stamps  for  office  use  $20  cash. 

(b)  Summarize  the  purchase  journal. 

(c)  Post  from  both  journals. 

4.  (a)  Write  up  the  following  transactions  for  a  merchant  dealing  in 
ladies'  suits  and  dresses.     Use  a  general  journal  and  a  purchase  journal. 

August,  19 — 

1.     Bought  from  Matthews  Clothes  Shop  a  bill  of  merchandise 

amounting  to  $9,000,  terms  2/10,  n/30. 
5.    Bought  from  Madison  Clothes  Company  the  following  bill  of 

goods,  terms  2/10,  n/30: 

25  Serge  dresses  at  $35  each. 

25  Taffeta  dresses  at  $45  each. 

12  Coats  at  $55  each. 

12  Coats  at  $30  each. 

12  Coats  at  $65  each. 
7.    Bought  from  Kaufman  Brothers  and  Company,  terms  n/60: 

4  doz.  Waists  at  $4  each. 

4  doz.  Waists  at  $6  each. 

2  doz.  Waists  at  $12  each. 
10.    Bought  from  Matthews  Clothes  Shop,  for  cash,  a  bill  of  merchan- 
dise amounting  to  $2,500. 
14.    Paid  Madison  Clothes  Company  by  check  for  invoice  of  the  5th, 

less  2%. 

16.  Bought  from  Overland  Motor  Car  Company  one  deliverycar  for  use 

in  the  business  $  1 ,400,  terms  6-mo.  note  for  $  1  ,ooo,and  cash  $400. 


THE  PURCHASE  JOURNAL  307 

22.     Paid  clerks'  salaries  in  cash  $210. 

31.     Bought  from  Kaufman  Brothers  and  Company  merchandise 
amounting  to  $750,  terms  2/10,  n/30. 

(b)  Summarize  and  rule  the  purchase  journal. 

(c)  Post  from  both  journals. 


CHAPTER  XIX 

THE   SALES   JOURNAL 

Purpose  of  Chapter. — 

i.  Principle  of  sales  analysis  by  groups. 
2.  Form  and  operation  of  sales  journals. 

The  Sales  Transaction  Analyzed. — Sales  of  stock-in-trade 
are  made  on  two  bases:  (i)  for  credit,  and  (2)  for  cash.  When 
credit  is  granted  a  customer,  payment  for  the  goods  is  deferred 
until  a  later  date.  Every  well-ordered  business  has  a  more  or 
less  uniform  credit  period.  Thus,  some  merchants  sell  goods  on 
30  days'  time.  There  is  a  tacit  agreement  that  the  customer  will 
make  payment  some  time  within  the  30-day  period.  Often  two 
or  more  bases  of  settlement  are  offered  the  customer.  He  may 
pay  the  amount  of  the  invoice  at  or  before  the  end  of  the  full 
credit  term  granted,  or  he  may  take  off  a  discount  for  earlier 
payment  and  so  not  have  to  pay  the  full  amount  of  the  invoice. 
For  example,  the  terms,  2/10,  n/30,  in  connection  with  a  $1,000 
sale  would  give  the  customer  the  option  of  paying  $980  some  time 
within  the  10-day  period  and  within  the  30-day  credit  limit. 
When  a  sale  is  made  for  cash,  payment  is  made  at  the  time  of  the 
sale,  although  in  many  businesses  it  is  the  custom  to  pay  within  10 
days  when  the  terms  are  stated  as  "cash." 

The  analysis  of  the  debit  and  credit  items  of  a  sales  transac- 
tion discloses  a  difference  between  the  sales  transaction  and  the 
purchase  transaction.  Inasmuch  as  it  is  through  the  sale  of 
stock-in-trade  that  the  merchant  makes  his  profit,  we  have  not 
merely  the  exchange  of  one  asset  for  another,  but  also  an  increase 
in  capital.  Were  the  commodity  sold  at  the  cost  price,  there 
would  be  simply  a  change  of  the  asset,  Merchandise,  for  some 

308 


THE  SALES  JOURNAL  309 

other  asset,  such  as  Cash.  Accounts  Receivable,  or  Notes  Re- 
ceivable. Normally,  however,  goods  must  be  sold  for  more  than 
they  cost,  else  there  is  no  incentive  for  carrying  on  business. 
Accordingly,  we  may  analyze  a  sales  transaction  as  resulting  in 
an  increase  in  the  assets,  Cash,  Accounts  Receivable,  or  Notes 
Receivable,  a  decrease  in  the  asset,  Merchandise,  and  an  increase 
in  capital.  At  the  time  of  each  sale  the  merchant  may  not  know 
exactly  the  amount  of  decrease  in  his  stock  or  of  increase  in  his 
capital.  This  does  not  in  any  way  void  the  principle  involved. 
The  amount  of  the  credit  entry  in  the  Sales  account  includes  not 
only  decrease  in  the  asset.  Merchandise,  but  also  increase  in 
capital.  It  is  only  at  the  end  of  the  fiscal  period,  by  means  of 
physical  inventory,  that  the  amount  of  the  cost  of  the  goods  sold 
can  be  determined,  and  the  Sales  account  broken  into  its  two 
parts,  one  of  which  indicates  the  cost  price  of  the  goods  sold,  the 
other  the  temporary  increase  in  capital.  From  this  increase  in 
capital  must  be  deducted  the  expenses  of  the  business. 

Journalizing  Sales  Transactions  by  Groups. — A  sale  of  mer- 
chandise on  account  may  be  recorded  as  a  debit  to  the  cus- 
tomer, by  name,  and  a  credit  to  the  Sales  account.  The  debit 
to  the  customer's  account  indicates  the  increase  in  the  asset, 
Accounts  Receivable.  The  credit  to  the  Sales  account  is  a  mixed 
item  indicating:  (i)  the  decrease  in  the  asset,  Merchandise,  and 
(2)  the  increase  in  capital,  i.e.,  profit.  The  excess  of  the  increase 
in  the  claim  against  the  customer  over  the  decrease  in  the  asset, 
Merchandise,  measures  the  profit.  To  illustrate,  suppose  that  a 
sale  of  merchandise  was  made  to  John  R.  Barry  for  $80.  This 
would  be  entered  in  the  general  journal  as  follows : 

John  R.  Barry $80  - 

Merchandise  Sales $8c  - 

If  sales  have  also  been  made  to  J.  B.  Grover  $100;  T.  L.  John- 
son $150;  R.  S.  Moore  $90;  and  O.  B.  Jackson  $80,  these  trans- 
actions might  be  recorded  in  the  same  way.     Effort  will  be  saved, 


310  FUNDAMENTALS  OF  ACCOUNTING 

however,  if  a  group  entry  is  made,  consisting  of  individual  debits 
to  each  of  the  customers  and  one  credit  to  Sales  for  the  total 
amount  of  the  debits  as  follows: 

John  R.  Barry $  80  - 

J.  B.  Grover 100  - 

T.  L.  Johnson 1 5°  - 

R.  S.  Moore 90  - 

O.  B.  Jackson 80  - 

Merchandise  Sales $5°°  ~ 

The  student  will  see  later  how  this  group  entry  is  made  the 
basis  of  the  entry  in  the  sales  journal. 

The  Sales  Journal  Record. — The  form  and  manner  of  opera- 
tion of  the  sales  journal  (Form  8),  are  similar  to  those  of  the  pur- 
chase journal.  The  sales  journal  records  nothing  but  sales  of 
stock-in-trade.  The  manner  of  making  the  record  in  the  sales 
journal  follows  almost  exactly  the  principle  of  the  group  entry 
already  explained.  As  to  form  and  the  use  of  columns,  the  sales 
journal  is  exactly  similar  to  the  purchase  journal.  Both  differ 
from  the  general  journal  in  two  main  particulars :  (1)  The  showing 
of  debit  and  credit  is  not  made  by  means  of  margins,  and  (2)  the 
money  columns  have  no  debit  and  credit  significance,  the  first 
column  showing  detailed  amounts,  the  second  column,  totals. 

In  the  purchase  journal  it  was  the  credit  side  of  the  entry  which 
differed  for  each  entry  involving  a  purchase,  while  the  debit  was 
always  to  Purchases  account.  The  analysis  of  a  sales  transaction 
shows,  however,  that  it  is  the  debit  side  of  the  transaction  which 
differs  with  every  sale,  the  credit  side,  "Merchandise  Sales,  Cr.," 
remaining  unchanged.  Hence,  in  the  sales  journal  it  is  the  debit 
side,  i.e.,  the  charge  to  each  customer,  which  is  made  from  day 
to  day  as  the  sales  occur.  At  the  end  of  the  month  a  summary 
credit  to  Merchandise  Sales  account  is  made,  the  amount  being 
the  total  of  the  charges  to  customers'  accounts  entered  from  day 
to  day. 


THE  SALES  JOURNAL 


311 


Every  sale  is  analyzed  completely  as  to  its  debits  and  credits 
by  the  daily  entry  in  the  sales  journal,  but  to  save  time  and  effort 
the  method  of  the  group  entry  is  used,  the  one  credit  to  Merchan- 
dise Sales  at  the  end  of  the  month  being  sufficient  to  restore  the 
equilibrium  of  the  journal. 

To  illustrate,  the  following  sales  transactions  will  be  recorded, 
first,  in  the  general  journal  and,  second,  in  the  sales  journal. 

April  19 — 

1.  A  furniture  dealer  sold  to  Richard  Robbins: 

1  Office  desk  $175. 

1  Typewriter  desk  $80,  the  terms  being  2/10,  n/30. 

2.  Sold  to  John  Duncan: 

2  Filing  cabinets  at  $100. 

3  Chairs  at  $15,  terms  on  a/c. 

30.     A  sale  was  made  to  J.  L.  Newberry  of: 
2  Typewriters  at  $120. 
1  Mimeograph  $150,  terms  being  n/30. 

Recorded  in  the  general  journal  without  explanations: 

April  1,  19—  (Page  7) 


Richard  Robbins 

2  55 

_ 

Merchandise  Sales 

1 8 

255 

- 

2 
John  Duncan 

Merchandise  Sales 

18 

245 

c 

3age  i 
245 

to) 

3° 
J.  L.  Newberry 

Merchandise  Sales 

18 

390 

0 

3age  : 
390 

»3) 

With  a  general  journal,  the  Sales  account,  after  posting,  will 
show  the  individual  sales  as  follows : 


Merchandise  Sales 


(Page  18) 


19— 

Apr. 

1 

2 

30 

7 

255 

10 

245 

23 

390 

312 


FUNDAMENTALS  OF  ACCOUNTING 


The  same  transactions  would  appear  in  the  sales  journal,  as 

follows : 

Sales  Journal  (Page  i) 


19— 
Apr. 


Richard  Robbins,  Utica,  N.  Y.,  2/10,  n/30 
1  Office  Desk,  #  47 
1  Typewriter  Desk  #  81 

John  Duncan,  Trenton,  N.  J.,  on  a/c 


30 


3° 


2  Filing  Cabinets  #  22  @ 

3  Chairs  #  Ao  @ 

J.  L.  Newberry,  Bflo.,  N.  Y.,  n/30 
2  Typewriters  #  U70  @ 
1  Mimeograph  #  Ei 

Merchandise  Sales,  Cr. 


Sioo 
$120 


^7 


28 


29 


175 
80 


200 
45 


240 
150 


255 


245 


39° 


890 


Comments.  The  student  will  note  that  here,  also,  there  is 
no  use  of  margins  for  showing  debit  and  credit.  A  uniform 
margin  to  give  the  detail  of  each  sale  is  observed,  however.  At 
the  close  of  the  month  the  credit  entry,  "Sales,  Cr.,"  is  shown,  it 
being  customary  to  use  the  term,  "  Cr.,"  inasmuch  as  the  position 
of  the  account  title,  Sales,  does  not  indicate  either  debit  or  credit. 
As  to  rulings  it  will  be  noted  that  the  single  line  extends  through 
one  money  column,  that  the  double  lines,  indicating  the  definite 
separation  between  the  sales  journal  record  for  the  month  of 
April  and  that  for  May,  which  will  immediately  follow,  extends 
through  the  date  column,  the  ledger  folio  column,  and  the  two 
money  columns ;  in  other  words,  the  double  rules  extend  through 
all  of  the  columns  except  the  wide  explanatory  column. 


Posting  the  Sales  Journal. — The  problem  of  posting  the  sales 
journal  is  similar  to  that  of  posting  the  purchase  journal.  In 
order  to  keep  the  information  as  to  customers'  balances  up  to 
date,  the  entries  made  in  the  sales  journal  must  be  posted  every 
day.     When  posting  from  the  purchase  journal,  the  entries  to 


THE  SALES  JOURNAL 


313 


creditors-'  accounts  are  always  on  the  credit  side  of  those  ac- 
counts. In  posting  the  sales  journal,  however,  the  entries  to 
customers'  accounts  are  always  on  the  debit  side.  Since  only 
the  debit  side  of  each  transaction  is  posted  daily,  the  ledger  will 
not  be  in  equilibrium  during  the  month  and  therefore  a  trial 
balance  should  not  be  taken  from  it.  At  the  end  of  the  month, 
however,  when  a  credit  to  Merchandise  Sales  account  for  the 
amount  shown  by  the  "Merchandise  Sales,  Cr.,"  or  summary 
entry  in  the  sales  journal,  is  posted,  the  equilibrium  of  the  ledger 
is  re-established.  The  student  should  be  careful  to  post  mark 
(cross-index)  all  items  posted  and  write  the  letter  "S,"  the 
initial  of  the  sales  journal,  near  the  folio  column  in  the  ledger. 

When  the  sales  journal  is  used  the  Merchandise  Sales  account 
will  show  in  one  amount  the  total  of  the  sales  instead  of  the  in- 
dividual items.  Note  the  use  of  the  letter  "S"  to  indicate  the 
book  of  original  entry. 


Merchandise  Sales 

(Page 

8) 

19— 
Apr. 

30 

s 

I 

890 

_ 

Richari 

)  ROBBINS 

(Page  27) 

19— 

Apr. 

1 

S 

I 

255 

- 

John  I 

)UNCAN 

(Page  28) 

19— 
Apr. 

2 

S 

I 

245 

J.  L. 

N 

EWBE 

KK 

i 

(Page 

>9) 

19— 
Apr. 

30 

s 

I 

390 

- 

Sales  Journal — New  Form. — The  new  form  of  sales  journal 
is  similar  to  the  last  form  of  purchase  journal  shown  on  page  301. 
A  sales  journal  in  this  form  cannot  be  used  unless  sales  tickets 


3H 


FUNDAMENTALS  OF  ACCOUNTING 


or  invoices  of  all  sales  are  made  in  duplicate  and  one  copy  retained 
by  the  seller.  If  sales  are  numbered  consecutively,  these  dupli- 
cates may  be  filed  numerically.  Details  of  any  particular  sale 
can  be  quickly  found  by  this  method. 


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Form  8.  Sales  Journal 

Standard-ruled  journal  paper  can  be  converted  into  this  type 
of  sales  journal  by  using  the  last  money  column  for  the  amount 
of  the  sale  and  writing  in  the  headings  as  indicated. 


Volume  of  Business  Done  with  Each  Customer. — As  was  the 
case  with  purchases,  it  is  frequently  desirable  to  have  full  in- 
formation as  to  the  volume  of  business  done  with  each  customer. 
This  is  of  use  to  the  sales  department  in  comparing  the  amount  of 
sales  made  to  customers  during  different  periods  of  time — 
months,  seasons,  or  years.  The  credit  department  can  also  use 
this  information  in  determining  the  amount  of  credit  to  extend 
to  customers.  This  information  is  usually  more  useful  than 
similar  information  in  regard  to  creditors  for  the  above  reasons. 
It  is  therefore  necessary  to  set  up  the  customer's  account  whether 
the  sale  is  for  cash  or  on  credit.  In  many  businesses,  however, 
this  is  not  done,  a  shorter  method  being  employed  which  does 
away  with  the  customer's  account  when  the  sale  is  for  cash. 

Suppose  that  a  sale  of  merchandise  was  made  to  J.  R.  Quincy 
for  cash,  $50.  In  accordance  with  the  method  to  be  followed 
here,  the  entries  will  be  as  follows: 


THE  SALES  JOURNAL  315 

April  20 

J.  R.  Quincy $50  - 

Merchandise  Sales $50  - 

April  20 

Cash $50  - 

J.  R.  Quincy $50  - 

The  net  effect  of  the  two  entries  is  to  show  a  debit  to  Cash  of 
$50  and  a  credit  to  Sales  of  $50,  the  debit  and  the  credit  in 
Quincy's  account  just  balancing  each  other.  If  a  record  of  the 
volume  of  business  done  with  Quincy  is  not  desired,  the  debit  to 
Quincy  in  the  sales  journal  and  the  credit  in  the  general  journal 
may  be  checked  (v)-  A  check  mark  in  the  folio  column 
indicates  that  the  item  is  not  to  be  posted. 

When  a  sales  journal  is  used  all  cash  sales  will  first  be  entered 
therein  as  debits  to  the  customer  and  credits  to  Merchandise  Sales 
account.  Whenever  payment  is  received — whether  at  future  date 
or  at  the  time  of  sale — another  entry  must  be  made  in  the  general 
journal,  taking  the  form: 

Cash $ 

Customer $ . . . . 

The  method  of  the  two  entries  just  shown  will  be  used  to  bring 
out  clearly  the  principle  involved. 

Other  Sales  Transactions. — Another  kind  of  transaction  most 
conveniently  recorded  in  the  sales  journal  is  the  withdrawal  of 
commodities  from  the  store  by  the  proprietor  or  proprietors  for 
personal  use.  These  are  charged  to  the  proprietors,  so  far  as 
possible,  at  cost  price.  As  the  goods  are  withdrawn  at  the  same 
price  at  which  they  were  purchased,  no  profit  is  involved  and  the 
transactions  therefore  differ  from  the  sale  of  stock-in-trade  to 
customers.  It  is  customary  to  record  such  transactions,  however, 
in  the  sales  journal,  the  current  record  being  the  charge  to  the 
proprietor,  the  credit  being  included  in  the  total  credit  to  Sales 
account  at  the  end  of  the  month. 


316  FUNDAMENTALS  OF  ACCOUNTING 

Also  it  often  happens  that  the  crating  and  packing  material 
which  came  with  goods  purchased  cannot  all  be  used  and  is  dis- 
posed of  to  others.  The  most  convenient  way  of  bringing  the 
charge  to  the  purchaser  on  the  books  is  through  the  sales  journal. 
These  charges  are  also  offset  by  the  summary  credit  entry  to 
Sales  at  the  close  of  the  month.  While  not  strictly  a  sale  of 
stock-in-trade,  there  is  no  serious  objection  to  this,  as  items  of 
this  kind  are  relatively  small  in  amount. 

Advantages  of  the  Sales  Journal. — The  advantages  of  the 
sales  journal  are : 

i.  Great  saving  of  time  and  space  in  recording,  especially 
when  the  abstract  form  (one  line  to  a  sale)  of  sales 
journal  is  used. 

2.  Fewer  postings.     Only  one  more  than  one-half  the  former 

number  are  required. 

3.  Much  space  saved  in  the  Sales  account  in  the  ledger. 

4.  Less  chance  of  making  errors  in  posting. 

5.  Provides  for  subdivision  of  labor.     Three  persons  can 

work  at  the  same  time. 

6.  Convenient  for  reference  because  all  sales  are  in  one  book. 

Questions 

1.  Explain  the  effect  on  the  fundamental  accounting  equation  of  a 
sale  of  merchandise. 

2.  What  is  meant  by  "journalizing  sales  by  groups?  " 

3.  What  is  a  sales  journal? 

4.  What  kind  of  sales  transactions  are  recorded  in  the  sales  journal? 

5.  If  an  automobile  company  sold  part  of  its  real  estate,  would  the 
entry  be  made  in  the  sales  journal?     Explain. 

6.  What  element  of  the  transaction  is  suppressed  in  the  sales  journal? 

7.  (a)  When  is  the  summary  entry  recorded  in  the  sales  journal? 
(b)  Why  is  the  term  "Cr."  used  in  the  summary  entry? 

8.  (a)  How  is  a  sales  journal  ruled  off  or  closed? 
(b)  Why  is  this  necessary? 

9.  (a)  Why  are  the  debits  of  the  sales  journal  posted  daily? 
(b)  Why  is  the  credit  posted  at  the  end  of  the  period? 


THE  SALES  JOURNAL  317 

10.  Why  is  it  impossible  to  take  a  trial  balance  before  posting  the 
summary  entry  of  the  sales  journal? 

11.  Explain  the  condensed  or  abstract  form  of  the  sales  journal. 

12.  How  would  you  convert  a  sheet  of  standard-ruled  journal  paper 
into  the  condensed  or  abstract  form  of  the  sales  journal? 

13.  (a)  How  may  the  volume  of  business  done  with  each  customer  be 
obtained? 

(b)  Name  two  or  more  possible  uses  for  this  information. 

14.  If  the  proprietor  withdraws  merchandise  for  his  personal  use,  is  the 
entry  recorded  in  the  sales  journal?     Why? 

15.  Where  would  you  enter  the  sale  of  small  items,  such  as  packing 
boxes,  which  came  with  purchases?    Why? 

16.  Are  cash  sales  recorded  in  the  sales  journal?     Explain. 

17.  What  is  the  effect  of  a  check  mark  (V)  in  the  folio  column  in  a 
journal? 

18.  If  a  note  is  received  from  a  customer  on  the  day  of  the  sale,  how  is 
the  transaction  recorded? 

19.  Compare  the  sales  journal  and  purchase  journal. 

20.  State  the  advantages  obtained  by  using  a  sales  journal. 

Problems 

1.  (a)  On  a  sheet  of  journal  paper  write  up  a  sales  journal  for  the  fol- 
lowing sales  made  by  the  Acme  Stationery  Company,  whose  terms  are  2/10, 
n/30. 

September,  19 — 

1.     Sold  to  J.  T.  Dempsey,  on  account,  office  supplies  for  $475. 

3.     Sold  to  Wyler  Sons  Company,  on  account,  printed  forms  for 

$325- 
5.     Sold  to  J.  Simon  and  Company  office  stationery,  on  account,  for 

$150. 
7.     Sold  to  Wyler  Sons  Company,  on  account,  2  Waterman's  fountain 
pens  at  $3.50  each. 

(b)  Summarize  and  rule  the  sales  journal. 

(c)  Using  one-half  sheet  of  ledger  paper,  post  the  sales  journal. 

2.  (a)  Record  the  following  transactions  in  a  sales  journal  for  the 
Dayton  Auto  Supply  Company. 

December,  19 — 

1.     Sold  to  J.  N.  White,  on  account,  2  auto  casings  at  $70  each  and  2 
tubes  at  $9  each. 


31 8  FUNDAMENTALS  OF  ACCOUNTING 

3.     Sold  to  Louis  Bauman  on  account: 
2  Air  Gauges  at  $1.25  each. 

1  Auto  Casing  at  $45  each. 

2  Auto  Tubes  at  $8  each. 

5.     Sold  to  Dayton  Repair  Shop,  on  account,  repair  material  for 

$i75- 

7.     Sold  to  Bay  State  Repair  Company,  on  account,  a  bill  of  acces- 
sories $150. 

9.     Sold  to  Geo.  O.  Wagner  on  account: 
6  Fisk  Tires  at  $45  each. 
6  Fisk  Tires  at  $54  each. 
10  Fisk  Tires  at  $8  each. 

(b)  Summarize  and  rule  the  sales  journal. 

(c)  Using  one-half  sheet  of  ledger  paper,  post  the  sales  journal. 

3.  (a)  Write  up  the  following  transactions  for  the  Haddon  Book 
Store.     Use  a  sales  and  a  purchase  journal. 

October,  19 — 

1.     Sold  to  Adolph  Hayes,  Nashville,  Tenn.,  terms  n/30: 
1  History  Textbook,  $2.75. 
1  Volume  of  Browning,  $2. 
1  Fountain  Pen,  $3.50. 
Note  Books,  $.50. 
3.     Purchased  from  the  Ronald  Press  Company,  New  York,  N.  Y., 
terms  n/60,  a  stock  of  textbooks  for  $800. 

5.  Sold  to  R.  N.  Row,  Memphis,  Tenn.,  3  English  textbooks  at  $1.75 

each,  terms  n/30. 

6.  Sold  to  Brownson  School,  Cincinnati,  Ohio,  terms  n/30: 

24  Kester's  Vol.  I  Accounting  with  working  material  at  $4  each. 
24  Kester's  Vol.  II  Accounting  at  $5  each. 
10  Boxes  Journal  Paper  at  $5  each. 
10  Boxes  Ledger  Paper  at  $5  each. 

7.  Purchased  from  the  Macmillan  Company,  Chicago,  111.,  terms 

2/10,  n/30,  500  textbooks  at  $2.70  each. 

8.  Purchased  from  Cleveland  Book  Concern,  Cleveland,  Ohio,  terms 

2/10,  n/30,  250  volumes  of  fiction  totaling  $675. 

9.  Sold  to  Lawrenceburg  School,  Lawrenceburg,  Ind.,  terms  2/10, 

n/30: 
24  Salisbury's  Geographies  at  $2.50  each. 
24  Volumes  Century  Readings  at  $2.75  each. 
24  Volumes  of  Shakespeare  at  $2  each. 


THE  SALES  JOURNAL  319 

(b)  Summarize  and  rule  both  journals. 

(c)  Post  from  both  journals. 

4.  (a)  Write  up  the  following  transactions  for  the  International 
Grain  Company,  whose  terms  are  2/10,  n/60.  Use  a  general,  sales,  and 
purchase  journal. 

July,  19— 

2.  Sold  to  Davis  Horton  on  account  100  bu.  wheat  at  $1.75;  150  bu. 

#2  yellow  corn  at  83c. 

3.  One  ton  of  hay  was  taken  as  feed  for  the  company's  horses,  $25. 

6.  Bought  from  H.  E.  Newman  for  cash  300  bu.  wheat  at  $1.60. 

8.  Sold  to  Robert  M.  Morgan,  Produce  Exchange,  taking  payment 

one-third  in  cash,  one-third  on  account,  and  a  30-day  note  for 

the  remainder;  400  bu.  #2  wheat  at  $1.70;  400  bu.  #2  corn  at 

85c;  150  bu.  #3  white  oats  at  50c. 
10.     Sold  to  M.  V.  Day  for  cash,  empty  barrels  $6. 
12.     Bought  from  Joseph  Ross  for  cash  1,000  lb.  straw  at  $5  for  use 

in  the  business. 
•15.     Paid  the  Ruoff  Milling  Company  $2,000  on  account. 
18.     Bought  50  tons  of  timothy  hay  from  J.  E.  Cleves  at  $24  per  ton, 

terms  n/30. 
24.     Paid  30-day  note  for  $1 ,000  due  today  with  6%  interest. 

(b)  Summarize  and  rule  the  sales  and  purchase  journals. 
(q)   Post  from  general,  sales,  and  purchase  journals. 

5.  (a)  Write  up  the  following  transactions  for  the  Benham  Lumber 
Company,  whose  terms  are  2/10,  n/60.  Use  a  general,  sales,  and  purchase 
journal. 

November,  19 — 

1.     Sold  to  H.  L.  Ehlers,  on  account,  5,000  ft.  Pa.  Hemlock  at  $37  M. 
5.     Sold  to  Edward  D.  Watson,  on  account,  3,000  ft.  yellow  pine  at 
$1 10  M ;  4,000  ft.  plain  oak  at  $200  M. 

7.  Bought  from  Young  and  Kennitt  10,000  ft.  yellow  pine  at  $100 

M;  10,000  ft.  plain  poplar  at  $150  M.    Paid  for  it  by  giving 
cash  for  one-half  and  60-day  note  for  the  remainder. 

9.  Bought  postage  stamps  for  cash  $25. 

12.     Paid  account  with  Games  Brothers  Company,  $2,000,  less  2%. 
15.     Used  500  ft.  yellow  pine  at  $100  M  for  making  partitions  for  the 

company. 
18.    Bought  from  Young  and  Kennitt  5,000  ft.  yellow  pine  at  $106  M, 

terms  n/30. 


320  FUNDAMENTALS  OP  ACCOUNTING 

20.     Sold  to  Ripley  Furniture  Company,  on  account: 
500  ft.  Mahogany  at  $  37  C. 
3,000  ft.  Qtd.  Oak  at  $325  M. 
5,000  ft.  Plain  Oak  at  $225  M. 
24.     Paid  salaries  of  office  employees  in  cash  $600. 
26.     Received  payment  from  the  Ripley  Furniture  Company  for  theh 
account  in  full  $2,235,  less  2%- 

(b)  Summarize  and  rule  the  sales  and  purchase  journals. 

(c)  Post  from  all  three  of  the  journals. 


CHAPTER   XX 
THE   CASH   RECEIPTS   JOURNAL 

Purpose  of  Chapter. — 

i.  Analysis  of  cash  receipts. 

2.  Form  and  operation  of  the  cash  receipts  journal. 

3.  Split  transactions. 

Cash  Receipts. — By  cash  we  mean  money,  or  what  represents 
money.  Checks  are  always  treated  as  cash,  even  though  some- 
times they  prove  uncollectible.  It  is  customary  to  accept  a  check 
as  payment  for  a  debt,  always  and  only  on  condition  that  the  check 
proves  collectible.  In  case  collection  cannot  be  made,  the  debt  is 
not  considered  as  having  been  paid.  In  some  small  businesses 
where  records  are  not  properly  kept,  one  occasionally  finds  post- 
age, revenue  stamps,  and  street-car  tickets  included  in  the  cash. 
This  is  not  the  standard  method  of  handling  these  items  and  will 
not  be  discussed  here  in  connection  with  cash. 

The  Cash  Receipt  Analyzed. — The  student  can  doubtless 
think  of  a  number  of  different  sources  of  cash.  He  knows  that  in 
the  first  place  cash  is  paid  in  by  the  owner  or  owners  for  the  pur- 
pose of  conducting  the  business.  After  the  business  gets  under 
way  and  sales  are  made,  cash  will  be  received  from  customers 
who  pay  cash  for  goods  bought,  and  also  from  other  customers 
when  they  pay  their  accounts  for  goods  sold  on  credit.  Some 
customers  may  have  given  notes  for  which  they  pay  cash  in 
settlement  when  they  come  due.  Cash  may  also  be  received  for 
interest  on  the  notes.  The  owner  of  the  business  may  have  to 
borrow  money  from  a  lender,  who  may  be  either  a  bank  or  private 
individual.     These  comprise  the  main  sources  of  cash.    Other 

321 


322  FUNDAMENTALS  OF  ACCOUNTING 

occasional  sources  are  from  the  sale  of  scrap  material,  old  packing 
boxes,  crates,  barrels,  etc.  A  business  man  may  also  dispose  of 
his  store  fixtures  and  furniture.  He  may  tear  out  the  counters 
and  show  cases  and  put  in  new  ones,  selling  the  old  fixtures  for 
whatever  they  may  bring.  Many  kinds  of  transactions  therefore 
involve  the  receipt  of  cash. 

The  effect  of  the  receipt  of  cash  will  in  all  cases  be  an  increase 
in  assets;  the  other  effect  will  depend  upon  the  nature  of  the  trans- 
action. In  some  cases  the  receipt  of  cash  brings  about  a  decrease 
in  other  assets.  For  example,  when  cash  is  received  from  a 
customer  on  account,  we  have  an  increase  in  the  asset.  Cash,  and 
a  decrease  in  the  asset,  Accounts  Receivable.  The  receipt  of 
cash  may  result  in  an  increase  in  liabilities.  When  money  is 
borrowed,  there  arises  a  liability  to  the  lender  of  the  money.  In 
some  instances  the  receipt  of  cash  may  cause  an  increase  in  capi- 
tal. For  example,  when  the  proprietor  invests  cash  in  his  busi- 
ness, the  result  is  an  increase  in  the  asset,  Cash,  and  an  equal 
increase  in  capital.  Thus  a  cash  receipt  may  be  offset  in  any  one 
of  three  ways,  namely,  a  decrease  in  another  asset,  an  increase  in 
a  liability,  or  an  increase  in  capital. 

Journalizing  Cash  Receipts. — It  follows  from  the  above  that 
the  debit  and  credit  analysis  will  be  either: 

i.  A  debit  to  Cash  and  a  credit  to  an  asset  account. 

2.  A  debit  to  Cash  and  a  credit  to  a  liability  account,  either 

the  personal  account  of  the  lender  or  a  note  payable 
account,  where  a  formal  promise  to  pay  was  given. 

3.  A  debit  to  Cash  and  a  credit  to  a  capital  account. 

Note  that  in  every  entry  there  is  a  debit  to  Cash.  It  is  only 
the  credit  side  of  the  entry  which  differs  in  accordance  with  the 
sources  of  the  receipt.  It  will  therefore  be  possible  to  make  a 
group  journal  entry  involving  writing  only  once  the  "  Cash,  Dr." 
for  the  total  amount  of  cash  received,  the  individual  credit  items 
showing  the  source  of  each  receipt.     This  will  bring  about  a 


THE  CASH  RECEIPTS  JOURNAL  323 

marked  saving  of  labor  and  time  and  may  include  the  cash  trans- 
actions of  one  day,  one  week,  or  even  a  month,  depending  upon 
the  wish  of  the  owner  as  to  how  frequently  he  desires  information 
concerning  this  group  of  transactions. 

The  Cash  Receipts  Journal  Record. — From  this  group  entry 
grew  the  cash  receipts  journal  (Form  9)  which  is  fundamentally 
the  same  as  the  other  special  journals  previously  explained.  At 
the  left  of  the  page  are  the  date  columns.  Next  comes  the  wide 
explanatory  column  for  the  name  of  the  account  to  be  credited. 
Following  this  on  the  same  line  and  as  many  of  the  next  lines  as 
are  necessary  is  a  full  explanation  of  the  transaction.  Then 
comes  the  ledger  folio  column.  The  money  columns  do  not  have 
the  debit  and  credit  significance  which  they  have  in  the  general 
journal.  Just  as  with  the  purchase  and  sales  journal,  the  first 
column  is  a  detail  column  while  the  second  is  a  total  column.  The 
bookkeeper  thus  uses  an  abbreviated  method  in  the  cash  receipts 
journal  by  stating  currently  for  each  transaction  only  the  credit 
item.  This  entry  is  a  complete  debit  and  credit  analysis  of  the 
transaction,  but  since  nothing  but  cash  receipts  are  recorded 
here,  it  is  not  necessary  to  set  up  formally  the  Cash,  Dr.  for  each 
one  of  the  transactions.  At  regular  periods,  however,  sometimes 
weekly,  sometimes  monthly,  the  journal  is  summarized  and  the 
Cash,  Dr.  item  is  entered,  the  same  way  that  the  purchase  journal 
is  summarized.  The  effect  of  this  is  to  bring  about  one  Cash, 
Dr.  just  equaled  by  the  credits  already  made  in  the  cash  journal. 
While  this  does  not  follow  the  debit  and  credit  form  of  the 
general  journal  as  to  margins,  the  effect  is  exactly  the  same. 

Form  of  the  Cash  Receipts  Journal. — To  illustrate  the  form 
and  use  of  the  cash  receipts  journal,  suppose  that  the  following 
transactions  have  taken  place  during  a  month : 

April,  19 — 

1.     A.  B.  Conrad,  the  proprietor,  invested  $5,000  in  cash. 
7.     Received  $500  in  cash  from  John  Jones  in  full  of  account. 


3^4 


FUNDAMENTALS  OF  ACCOUNTING 


14.     Borrowed  $1,000  from  the  Merchants  Bank  on  his  30-day  note 
with  interest  at  6%. 

20.     Sold  D.  E.  Field's  bill  of  goods  for  cash  $700  (first  record  appears 
in  the  sales  journal). 

30.     Received  check  for  $100  from  James  Lowell  for  rent  of  office  for 
May. 
Robert  Norris  paid  his  30-day  note  of  3/31/ — ,  $1,000,  with  in- 
terest at  6%. 

These  transactions  would  appear  as  follows : 


L^gyjg^*^  A^<LS-^^&JZ/ '    (/rr&tst^t-tz^S 


Hs-tet. 

JZ'C' 00  is**  -*~s     C r— 

£xB?t>rr*PSnrt 

/? 

ft 

-'cV. 

7/. 

/7^. 

/ 

/?S?  (Z^A^.tyLs 

__^^^__^ 

\±'& 

.-./.M-J.^ 

\X 

'a  c    — 

/       JT 

Zc 

O  0   

tn 

JlS<&l£/s 

" 

2 

OO    — 

1n 

/&~rj~ 

GLS2«»MrJ*  JLJ 

I 

^-                       ^^'^^ 

In 

"fa£Uj^LjM*rJ!As 

W    ^^^f^-    —7 

/-& 

0  0    — 

•  '■o 

\^Lj^s^u 

\f~— 

ia 

cz^^gsy^ 

£.2. 

C.5-— 

Form  9.  The  Cash  Receipts  Journal 


Comments.  The  student  will  note  that  at  the  time  the 
entries  are  made  only  the  credit  account  appears,  that  a  some- 
what uniform  margin  immediately  following  the  account  title  is 
observed  for  the  statement  of  explanatory  data,  that  the  first 
column  is  used  to  show  the  detail  of  the  cash  receipts,  and  the 
second  column  shows  the  total  of  the  detailed  receipts,  listed  in 
the  first  column,  this  total  being  extended  into  the  second  column 
on  the  next  line  below  the  last  item  in  the  first  column.  At  the 
end  of  this  first  month  the  journal  is  summarized  and  the  debit 


THE  CASH  RECEIPTS  JOURNAL  325 

entry,  that  is,  Cash,  Dr.,  is  shown  for  the  total  amount  of  cash 
received  for  the  month  as  appearing  in  the  second  column.  The 
double  rules  for  this  journal  are  exactly  the  same  as  those  for 
the  purchase  and  sales  journals.  The  student  should  make 
sure  that  he  understands  the  operation  of  the  cash  receipts 
journal. 

Posting  the  Cash  Receipts  Journal. — It  is  customary  to  post 
at  the  close  of  each  day  the  items  which  have  been  entered  in  the 
cash  receipts  journal.  Since  the  debit  element  of  each  entry  is 
suppressed  currently  and  brought  onto  the  journal  only  at  the 
time  of  summarizing,  the  account  titles  which  have  been  entered 
in  the  cash  receipts  journal  are  all  credits.  Only  credit  posting 
will  therefore  be  made  to  the  ledger,  throwing  it  out  of  balance 
temporarily.  When  the  summary  entry,  Cash,  Dr.,  is  entered  it 
exactly  equals  the  itemized  credits  set  up  from  day  to  day.  When 
this  is  posted  to  the  debit  side  of  the  Cash  account,  the  ledger  will 
be  in  equilibrium  again.  Since  a  trial  balance  is  usually  taken 
at  the  end  of  each  month  the  cash  receipts  journal  must  always 
be  summarized  and  posted  completely  before  that  time.  Be 
sure  to  place  the  letter  "C"  near  the  folio  column  in  the 
ledger  to  indicate  the  special  journal  from  which  the  item  was 
posted. 

Comparison  with  the  Purchase  Journal. — The  cash  receipts 
and  purchase  journals  are  similar  in  that  they  both  group  debits 
and  credits  in  the  same  manner,  i.e.,  the  day-to-day  items  are  all 
credits  and  the  total  provides  the  debit  item.  They  are  unlike 
in  the  effect  of  the  credits.  The  credits  in  the  purchase  journal 
are  all  increases  in  accounts  payable  or  liabilities,  while  the 
credits  in  the  cash  receipts  journal  may  record:  (1)  a  decrease  in 
assets,  (2)  an  increase  in  liabilities,  or  (3)  an  increase  in  capital. 
There  may  also  be  some  difference  in  the  arrangement  of  the 
transactions  on  the  pages.  However,  fundamentally  they  are 
alike  because  both  are  special  journals  designed  to  organize  debits 


326 


FUNDAMENTALS  OF  ACCOUNTING 


and  credits  in  group  form  for  convenience  in  collecting  informa- 
tion and  arranging  it  for  easy  transfer  to  the  ledger. 

Advantages  of  the  Cash  Receipts  Journal. — The  advantages 
of  the  other  special  journals — purchase  and  sales — apply  with 
equal  force  to  this  journal,  and  it  is  not  deemed  necessary  to 
repeat  them  here. 


Split  Transactions. — When  special  journals  are  used,  it  some- 
times becomes  necessary  to  split  a  transaction,  i.e.,  analyze  it 
according  to  the  special  journals  in  use  and  then  record  it  by 
using  two  or  more  journals. 

Customers  often  take  advantage  of  discounts  on  sales  by  early 
cash  payment.  The  nature  of  sales  discount  and  the  method  of 
recording  it  when  only  one  journal — the  general  journal — is  used 
were  fully  discussed  in  Chapter  XVII.  To  illustrate  the  method 
of  handling  such  a  transaction,  we  shall  show  the  record  of  the 
payment:  (i)  when  only  a  general  journal  is  used,  and  (2)  when 
the  general  journal  and  the  cash  receipts  journal  are  used. 

Assume  that  on  April  7,  19 — ,  Thomas  Cameron  paid  $980 
in  cash  for  sale  of  March  28,  $1,000,  less  2%  in  10  days. 

1 .  Recorded  in  the  general  journal  only,  this  transaction  will 
appear  as  follows : 

Cash $980  - 

Sales  Discount 20  - 

Thomas  Cameron $1,000  - 

2.  When  the  general  journal  and  cash  receipts  journal  are 
used,  the  transaction  will  be  entered  as  follows: 

Cash  Receipts  Journal 


19— 

Apr 


Thomas  Cameron 


sale  of  3/28/- 
See  J.  p.— 


less  2%. 


980 


THE  CASH  RECEIPTS  JOURNAL 
General  Journal 


327 


April  7,  19 — 
Sales  Discounts 

Thomas  Cameron 

Allowance  of  2%  cash  disct.  on  $1,000 
sale  of  3/28/ — .    See  C.  R.  J.  p. — 


These  two  entries  have  the  same  effect  as  the  single  general 
journal  entry.  The  entry  in  the  cash  receipts  journal  credits 
Cameron's  account  $980  and  provides  for  including  the  $980  as  a 
debit  to  Cash  when  this  journal  is  summarized.  The  entry  in 
the  general  journal  indicates  a  debit  to  Sales  Discount  of  $20  and 
a  credit  to  Thomas  Cameron's  account  of  $20.  The  change  in 
Thomas  Cameron's  account  consists  of  two  credits,  one  of  $980 
and  another  of  $20,  instead  of  one  amount  of  $1,000. 

Other  examples  of  split  transaction  requiring  entries  in  more 
than  one  journal  are  given  below : 

1.  The  discounting  of  a  note  receivable  or  note  payable. 

This  would  be  handled  in  the  same  manner  as  the 
sales  discount  transaction  above,  except  that  in  the 
general  journal  the  debit  would  be  to  Interest  Cost 
account  and  the  credit  to  Notes  Receivable  or  Notes 
Payable,  depending  on  whether  the  note  discounted 
was  someone's  else  or  our  own. 

2.  Cash  sales  recorded  in  the  sales  journal. 

3.  Sales  recorded  in  the  sales  journal  that  are  paid  in  whole 

or  in  part  by  promissory  notes  or  any  other  property  at 
the  time  of  sale.  (No  part  of  this  transaction  is 
recorded  in  the  cash  receipts  journal.) 

Questions 

1.  What  do  you  understand  by  a  "cash  transaction"? 

2.  On  what  condition  is  a  check  accepted  as  payment  for  a  debt? 

3.  Name  as  many  as  you  can  of  the  main  sources  from  which  cash  is 
received  in  an  ordinary  business. 


328  FUNDAMENTALS  OF  ACCOUNTING  ' 

4.  What  are  some  of  the  occasional  sources  of  cash? 

5.  Explain  the  increases  and  decreases  of  the  asset,  liability,  and 
capital  elements  in  each  of  the  following  transactions: 

(a)  Cash  investment  in  a  business. 

(b)  Cash  received  from  a  customer  paying  an  account. 

(c)  "  "  "     "       "     for  a  cash  sale. 

(d)  "  "  "     "       "     settling  his  note. 

(e)  "  "  "     "       "     paying  interest  on  his  note. 

(f)  "  "  for  the  proprietor's  own  note  used  for  borrowing 

money  at  a  bank. 

(g)  "         "  from  a  tenant  for  rent. 

(h)       "         "  for  wages  or  salaries  for  services  rendered. 

6.  Name  the  credits  and  debits  in  each  of  the  cases  under  Question  5. 

7.  What  in  each  of  the  examples  of  Question  5  is  the  debit  element? 

8.  How,  therefore,  in  this  group  of  transactions  is  it  possible  to  make  a 
group  entry  for  cash  receipts? 

9.  What  form  does  this  group  entry  take  in  the  cash  receipts  journal, 
i.e.,  is  it  the  regular  journal  form? 

10.  How  is  a  cash  receipt  entered  currently  in  the  cash  receipts  journal? 

11.  How  finally  is  the  group  entry  completed? 

12.  Explain  the  uses  of  the  various  columns  in  the  cash  receipts  journal? 

13.  Are  margins  made  use  of  to  indicate  the  debits  and  credits  of  the 
entry?     Why? 

14.  How  often  is  the  cash  receipts  journal  summarized? 

15.  When  should  the  current  record  in  the  cash  receipts  journal  be 
posted? 

16.  What  is  the  effect  on  the  equilibrium  of  the  ledger  of  this  day- to- 
day posting? 

17.  When  is  the  summary  entry  posted? 

18.  What  is  the  effect  of  the  posting  of  the  summary  entry  on  the 
equilibrium  of  the  ledger? 

19.  How  are  the  ledger  and  journal  entries  cross-indexed? 

20.  Which  one  of  the  other  journals  has  its  debit  element  suppressed? 

21.  Compare  the  cash  receipts  journal  and  the  purchase  journal. 

22.  What  are  the  advantages  of  the  cash  receipts  journal? 

23.  What  is  meant  by  a  "split  transaction"? 

24.  Explain  the  method  of  entering  a  transaction  involving  a  cash 
discount. 

25.  Give  several  other  examples  of  transactions  requiring  records  in 
two  or  more  journals. 


THE  CASH  RECEIPTS  JOURNAL  329 

Problems 

1.  (a)  Write  up  a  cash  receipts  journal  for  the  following  transactions: 

June,  19— 

1.  James  T.  Carlton  began  business  with  a  cash  investment  of 

$5,000. 
5.     Received  cash  of  $500  from  C.  N.  Jackson  on  account. 
8.     Received  cash  of  $200  from  A.  B.  Conroy  for  rent  of  building. 
10.     Received  cash  of  $2,000  from  John  D.  Wright  in  payment  for  his 

30-day  note. 

(b)  Summarize  and  rule  the  cash  receipts  journal. 

2.  (a)  Write  up  a  general  and  a  cash  receipts  journal  for  the  following 
transactions: 

August,  19 — 

5.     John  Tompkins  began  business  with  an  investment  of  $10,000 

cash  and  $2,000  in  furniture  and  fixtures. 
7.     Received  cash  of  $200  from  Elgin  Sales  Company  for  rent  of 
adjoining  storeroom. 
10.     Blue  Ribbon  Dairy  Company  paid  their  account  of  $875  by  check 

for  $400  and  their  30-day  note  for  $475. 
15.     Received  payment  on  T.  M.  Well's  note  of  $1,000,  with  6%  in- 
terest for  60  days,  $10,  total  $1,010. 
25.     Received  check  for  $392  from  Hollander  Brothers  paying  for 
goods  sold  to  them  $400,  less  2%. 

(b)  Summarize  and  rule  the  cash  receipts  journal. 

(c)  Post  to  a  ledger  sheet  of  paper  the  entries  from  both  journals. 

3.  (a)  From  the  following  transactions  pick  out  the  items  belonging 

in  the  cash  receipts  journal  and  enter  them. 

January,  19 — 

3.     R.  L.  Badger  started  business  with  an  investment  of  $5,000  cash 

and  $6,000  merchandise. 
5.     Sold  merchandise  to  Harry  C.  Knox,  on  account,  for  $600,  terms 

2/10,  n/30. 
7.    Bought  merchandise  from  Cleveland  and  Company,  on  account, 
$7,000. 
10.     William  Grant  paid  his  90-day  note  of  $2,000  with  6%  interest, 

total  $2,030. 
15.     Received  check  for  $588  from  Harry  C.  Knox  paying  account  in 
full,  $600,  less  2%. 


330  FUNDAMENTALS  OF  ACCOUNTING 

17.     Sold  merchandise  to  H.  E.  Blackwell  for  cash  $800. 
20.     Paid  clerks'  salaries  in  cash  $300. 

25.     Paid  Cleveland  and  Company  for  merchandise  purchased  on 
January  7,  $7,000. 

(b)  Summarize  and  rule  the  cash  receipts  journal. 

4.  (a)  Write  up  general,  cash  receipts,  purchase,  and  sales  journals 
for  the  following  transactions: 

June,  10— 

1.     George  A.  Harper  opened  a  furniture  business  with  cash  $10,000 

and  merchandise  $25,000. 
3.     Sold  the  following  merchandise  to  L.  C.  Kirk,  Pittsburgh,  Pa., 

terms  n/10.     1  office  desk  $125,  1  chair  $15. 

5.  Bought  stationery  for  use  in  the  office  from  Philadelphia  Station- 

ers, on  account,  $250. 

6.  Sold  merchandise,  on  account,  to  M.  E.  Farley  $1,500,  terms  3/10, 

n/40. 
8.     Bought  from  Laswell  Wholesale  Furniture  Company,  New  York, 
N.  Y.,  3  oak  bedroom  suites  at  $400  each,  terms  2/10,  n/60. 

14.  Received  cash  from  M.  E.  Farley  in  full  for  his  account  of  the 

6th,  less  3%. 

15.  Received  L.  C.  Kirk's  check  for  goods  purchased  on  June  3, 

amount  $140. 

16.  Bought  merchandise  from  Laswell  Wholesale  Furniture  Com- 

pany, amounting  to  $4,000,  terms  2/10,  n/60. 
20.     Sold  a  bill  of  furniture  to  Harry  E.  Copeland,  Pittsburgh,  Pa., 
for  cash  $2,500. 

(b)  Summarize  and  rule  the  cash  receipts,  sales,  and  purchase  journals. 

(c)  On  a  sheet  of  ledger  paper  post  all  of  the  entries  made. 


CHAPTER   XXI 
THE   CASH  DISBURSEMENTS  JOURNAL 

Purpose  of  Chapter. — 

i.  Analysis  of  cash  disbursements. 

2.  Form  and  operation  of  cash  disbursements  journals. 

3.  Split  transactions. 

Cash  Disbursements. — Just  as  the  cash  receipts  journal  con- 
tains only  cash  received,  so  the  cash  disbursements  journal  is  limited 
to  those  transactions  involving  cash  paid  out.  The  student  is  re- 
ferred to  Chapters  IV  and  XX  for  a  discussion  of  what  is  meant 
by  "  cash."  As  here  used,  unusual  forms  of  cash,  such  as  postage 
and  revenue  stamps  and  street-car  tickets,  will  not  be  included. 
Since  this  journal  will  record  no  transactions  except"  those  involv- 
ing the  disbursement  of  cash,  its  title  is  self-explanatory. 

Analysis  of  a  Cash  Disbursement. — In  Chapter  XX  it  was 
shown  that  the  sources  from  which  cash  is  received  comprise, 
usually: 

1.  The  original  investment  of  the  owner  or  owners. 

2.  Sales  to  customers  either  on  open  account  or  on  account 

of  notes  which  they  have  given. 

3.  Interest  income,  rent  income,  etc. 

4.  Miscellaneous  sources,  such  as  the  sale  of  furniture  and 

fixtures,  packing  boxes,  crates,  etc. 

In  the  same  way  the  reasons  for  the  expenditure  of  cash  may 
be  classified : 

1 .  Upon  the  organization  of  a  business  cash  may  be  spent  for 
necessary  physical  equipment,  including   store   furniture   and 

331 


332  FUNDAMENTALS  OF  ACCOUNTING 

fixtures,  desks,  typewriters,  safe,  etc.,  delivery  equipment,  and 
even  the  building  and  land  where  the  business  is  to  be  con- 
ducted. 

2.  The  next  expenditure  involves  the  purchase  of  stock-in- 
trade.  Sometimes  these  purchases  may  be  on  account,  that  is, 
the  cash  is  not  paid  at  the  time  of  the  purchase. 

3.  This  will  involve  at  some  later  date  the  settlement  of  the 
accounts  or  notes  payable  for  goods  previously  purchased. 

4.  Throughout  the  course  of  the  business,  cash  must  be  ex- 
pended for  the  services  of  salesmen,  clerks,  bookkeepers,  stenog- 
raphers, cashier,  etc.,  janitor  service,  supplies,  such  as  fuel,  light, 
wrapping-paper,  twine,  boxes,  crates  and  cartons — in  fact  all 
items  which  can  be  classed  as  expenses. 

5.  Occasionally,  also,  there  will  be  cash  refunds  to  customers 
upon  the  return  of  unsatisfactory  material. 

6.  There  will  also  be  cash  given  in  change,  as  when  a  customer 
gives  a  check  for  an  amount  larger  than  his  bill. 

7.  The  proprietor  may  withdraw  cash  for  personal  use. 

8.  Occasionally  one  finds  an  exchange  of  checks  as  a  matter 
of  convenience  and  courtesy  to  a  customer  desiring  to  send  money 
by  check  to  an  out-of-town  person,  the  merchant's  check  having 
better  standing  because  he  is  more  widely  known.  This 
somewhat  unusual  procedure  will  not  be  discussed  in  this  chapter. 

In  reviewing  these  transactions,  note  that  in  the  first  and 
second  cases  the  result  of  the  expenditure  was  an  exchange  of 
assets,  the  decrease  of  the  asset,  Cash,  and  the  increase  of  assets, 
such  as  store  furniture  and  fixtures,  stock-in-trade,  etc.  In 
the  third  case  the  decrease  in  the  asset,  Cash,  was  equaled  by 
a  decrease  in  the  liability  accounts  or  notes  payable.  In  the 
fourth  case  the  cash  expenditure  may  be  said  to  result  in  a  de- 
crease in  capital,  where  payment  was  made  for  the  services  of 
salesmen,  clerks,  or  other  expense  purchases  which  have  been 
consumed  at  the  time  the  disbursement  occurred.  Therefore,  a 
cash  expenditure  may  be  reflected  by  an  increase  in  assets,  a 
decrease  in  liabilities,  or  a  decrease  in  capital. 


THE  CASH  DISBURSEMENTS  JOURNAL  333 

Journalizing  Cash  Disbursements. — In  journalizing  transac- 
tions involving  the  disbursement  of  cash  the  credit  item  is  always 
a  credit  to  Cash.  Were  all  of  the  cash  disbursement  transactions 
held  over  for  entry  to  the  close  of  the  day,  a  group  entry  could  be 
made  which  would  show  as  debits  the  several  accounts  repre- 
senting: (1)  increase  in  assets,  (2)  decrease  in  liabilities,  or  (3) 
decrease  in  capital,  and  one  credit  to  Cash  for  the  total  amount. 
We  may  enter  the  transactions  of  a  day,  a  week,  or  even  a  month 
in  one  group  entry.  It  is  only  a  step  from  this  method  of  group 
entries  to  a  special  journal. 

The  Cash  Disbursements  Journal  Record. — Where  a  special 
journal  is  used  exclusively  to  record  cash  disbursements,  the 
entries  made  from  day  to  day  are  incomplete  to  the  extent  that 
the  credit  item  of  each  entry  is  not  formally  expressed.  Since 
all  entries  here  recorded  involve  the  disbursement  of  cash,  there 
is  no  need  for  a  formal  statement  of  the  credit  item  of  each  entry. 
Every  transaction  so  recorded,  however,  has  just  as  complete  a 
debit  and  credit  analysis  as  if  the  credit  item  were  formally  ex- 
pressed. At  the  end  of  a  given  time,  a  week  or  a  month,  the 
credit  item,  Cash,  Cr.,  is  formally  set  up  for  the  total  of  all  the 
debits  shown  in  detail  for  the  period. 

This  journal,  therefore,  follows  the  form  and  method  of  the 
journals  previously  explained.  At  the  extreme  left  are  the  date 
columns  followed  by  the  wide  explanation  column  in  which  is 
entered  the  name  of  the  debit  account  involved  in  the  transaction; 
this  in  turn  being  followed  on  the  same  line  at  a  uniform  margin 
by  a  brief  but  complete  explanation  of  the  transaction,  this  ex- 
planation running  over  as  many  lines  as  are  necessary;  then 
comes  the  ledger  folio  column  followed  by  the  two  money 
columns,  the  first  of  which  is  for  the  record  of  the  detailed 
disbursement  items,  while  the  second  is  used  to  show  the  total. 

Form  of  the  Cash  Disbursements  Journal. — To  illustrate 
the  form  and  use  of  this  journal  (see  Form  10)  we  shall  assume 


334  FUNDAMENTALS  OF  ACCOUNTING 

that  the  following  transactions  occurred  during  the  month  of 
April,  19 — : 


April,  19 — 

4.     Bought  a  desk  for  office  use  from  James  Smith  and  Company  for 

S150  in  cash. 
Paid  Styles  and  Brother  by  check  for  bill  of  office  printing  and 

stationery  $63.75. 
12.     Gave  Joseph  Webster  check  for  bill  of  March  15,  $500,  less  1%. 
16.     A.  B.  Conrad,  the  proprietor,  withdrew  Sioo  in  cash  for  personal 


Paid  $5  in  cash  for  scrubbing  floors  and  cleaning  windows. 
Bought  invoice  of  merchandise  from  Bates  and  Company  for 
cash  S450.    (First  record  appears  in  the  purchase  journal.) 
30.     Paid  Ross  Brothers  by  check  $603  for  his  (Conrad's)  30-day  note 
of  April  1,  $600  and  30  days'  interest  at  6%,  $3. 


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Form  10.  Cash  Disbursements  Journal 


THE  CASH  DISBURSEMENTS  JOURNAL  335 

Comments.  The  titles  of  some  of  the  accounts,  such  as  Print- 
ing and  Office  Stationery,  etc.,  will  depend  upon  the  amount  of  de- 
tailed information  desired  by  the  owner  of  the  business.  While 
this  item  could  be  charged  to  General  Expense,  it  is  better  to  give 
it  a  more  specific  title,  so  that  the  proprietor  will  know  exactly 
the  object  of  the  expenditure.  In  each  case  the  account  title  to 
be  charged  is  first  set  up  and  is  then  followed  by  a  brief  explana- 
tion. The  summary  entry  for  the  month's  disbursements  is 
recorded  at  the  close  of  the  month  as  a  credit  to  Cash,  the  total 
being  entered  in  the  second  column,  opposite  Cash,  Cr.  The 
rulings  are  the  same  as  for  the  cash  receipts  journal. 

Posting  the  Cash  Disbursements  Journal. — At  the  close  of 
each  day  the  entries  of  that  day's  transactions  should  be  trans- 
ferred to  their  respective  accounts  in  the  ledger.  In  every  in- 
stance the  posting  will  be  to  the  debit  side  of  the  account,  since 
only  the  debit  of  the  transactions  has  been  entered,  the  credits 
being  temporarily  suppressed.  This  incomplete  posting  will 
throw  the  ledger  out  of  equilibrium  for  the  time  being.  At  the 
close  of  the  month,  however,  when  the  summary  entry,  Cash,  Cr., 
is  set  up  in  the  journal  and  posted  to  the  ledger,  the  equilibrium 
will  be  re-established. 

Postings  must  be  post  marked  (cross-indexed)  both  in  the 
ledger  and  in  the  journal.  In  the  journal  the  page  to  which  the 
item  was  transferred  in  the  ledger  will  be  entered,  while  in  the 
ledger  the  letter  "  C  "  and  the  page  on  which  the  item  is  recorded 
in  the  special  journal  will  be  shown.  The  time  and  effort  saved 
by  the  cash  disbursements  journal  is  obvious.  In  making  the 
journal  record  the  omission  of  the  credit  side  of  each  transaction 
effects  a  great  saving,  while  the  posting  of  one  credit  to  Cash 
instead  of  numerous  detailed  credits  is  also  a  great  help. 

Comparison  with  Sales  Journal. — Cash  disbursements  and 
sales  journals  have  in  common  the  same  grouping  of  debits  and 
credits,  i.e.,  the  transactions  recorded  in  each  journal  from  day 


336  FUNDAMENTALS  OF  ACCOUNTING 

to  day  result  in  debits,  while  the  credit  is  obtained  from  the  total 
of  all  the  items  recorded.  They  differ  as  to  the  effect  the  debits 
have  on  assets,  liabilities,  and  capital.  All  the  debits  in  the  sales 
journal  represent  increases  in  the  asset,  Accounts  Receivable, 
while  the  debits  in  the  cash  disbursements  journal  may  repre- 
sent: (i)  increase  in  an  asset,  (2)  decrease  in  a  liability,  or  (3) 
decrease  in  capital.  There  is  usually  some  difference  in  the  ar- 
rangement of  the  details  of  the  transactions  on  the  pages  of  the 
two  journals.  Yet  they  remain  the  same  fundamentally,  because 
both  are  devices  designed  to  collect  increases  and  decreases  in 
assets,  liabilities,  and  capital  and  arrange  them  in  convenient 
form  for  transfer  to  the  ledger. 

Advantages  of  the  Cash  Disbursements  Journal. — All  the 
advantages  enumerated  for  the  other  special  journals  are  appli- 
cable to  the  cash  disbursements  journal.  The  student  should 
turn  to  the  cash  disbursements  journal  and  reason  out  these 
advantages  for  himself. 

Split  Transactions. — What  was  said  in  Chapter  XX  about  the 
analysis  of  transactions  for  the  purpose  of  making  the  complete 
record  in  two  or  more  journals  applies  equally  well  to  the  cash 
disbursements  journal.  The  principal  types  of  transactions 
requiring  only  a  partial  record  in  this  journal  are: 

1 .  Transactions  involving  cash  discount  on  purchases. 

2.  All  cash  purchases  recorded  in  the  purchase  journal. 

3.  The  prepayment  of  notes  payable,  i.e.,  the  payment  be- 

fore maturity  of  promissory  notes  issued  by  the 
proprietor  on  which  an  allowance  is  made  for  early 
settlement  in  cash. 

4.  All  transactions  involving  an  allowance  for  breakage, 

imperfections,  etc.,  at  the  time  cash  payment  is  made. 

5.  Another  group,  no  part  of  which  is  recorded  in  the  cash 

disbursements  journal  at  this  time,  consists  of  purchases 
recorded  in  the  purchase  journal  that  are  paid  at  the 


THE  CASH  DISBURSEMENTS  JOURNAL 


337 


time  of  purchase  in  whole  or  in  part  by  promissory 
notes  or  other  property. 

To  illustrate  the  method  of  handling  a  transaction  involving 
cash  discount  on  a  purchase  we  shall  show  the  transaction  as 
recorded  in  the  cash  disbursements  journal  and  the  general  journal 
at  the  time  of  payment. 

Assume  that  on  April  20,  19 — ,  the  proprietor  paid  Robert 
Grant  $490  in  cash  for  invoice  #7  of  April  10,  $500,  terms  2/10. 

This  transaction  must  be  split  and  recorded  in  two  journals  as 
indicated  below : 


Cash  Disbursements  Journal 


Date 


19- 
Apr. 


Accounts  Dr. 


Robert  Grant 


Explanation 


inv.  #  7,  less  2%.  See  J.  p. 


General  Journal 


Items 


490 


Total 


April  20,  19 — 

Robert  Grant 

Purchase  Discounts 

Allowance  of  2%  cash  disct.  on  inv.  #7 
See  C.  D.  J.  p.  — . 


The  effect  of  the  records  in  the  two  journals  is:  for  the  cash 
disbursements  journal,  a  debit  to  Robert  Grant  of  $490  and  a 
credit  (suppressed)  to  Cash  of  $490;  for  the  general  journal,  a 
debit  to  Robert  Grant's  account  of  $10  and  a  credit  to  Purchase 
Discounts  of  $10.  Although  Robert  Grant's  account  shows  a 
credit  of  $500  entered  at  the  time  the  proprietor  purchased  the 
goods,  only  $490  can  be  entered  in  the  cash  disbursements 
journal  as  a  debit  to  his  account  because  that  is  all  the  cash  that 
has  been  paid  out.     After  posting  this  item,  Grant's  account  still 


338  FUNDAMENTALS  OF  ACCOUNTING 

shows  a  credit  of  $10.  Since  this  amount  was  allowed  for  early 
payment  it  is  no  longer  a  liability  but  represents  an  increase  in 
capital  and  therefore  must  be  transferred  to  some  capital  account. 
This  is  accomplished  by  the  entry  in  the  general  journal  debiting 
Robert  Grant  $10  and  crediting  Purchase  Discounts  $10. 

Questions 

i.  What  do  you  understand  by  a  disbursement  of  cash? 

2.  Name  the  main  classes  of  cash  expenditures. 

3.  Explain  the  increases  and  decreases  of  the  asset,  liability,  and  pro- 
prietorship elements  in  each  of  the  following  transactions: 

(a)  Cash  paid  for  purchase  of  store  and  office  furniture  and  fixtures. 

(b)  Cash  paid  to  a  creditor  for  a  cash  purchase  of  merchandise. 

(c)  Cash  paid  to  a  creditor  on  open  account. 

(d)  Cash  paid  for  payment  of  a  note  payable. 

(e)  Cash  paid  for  the  use  of  money — interest. 

(f)  Cash  spent  for  payment  of  wages  and  salaries. 

(g)  Cash  spent  for  fuel  and  light,  wrapping  paper,  twine,  stamps,  etc. 
(h)  Cash  given  to  customers  in  settlement  of  their  claims  on  account 

of  unsatisfactory  goods, 
(i)  Cash  given  to  a  customer  as  "change." 
(j)  Cash   withdrawn    by    the   proprietor  for   other   than   business 

purposes. 

4.  State  the  debits  and  credits  in  each  of  the  transactions  of  Question  3 . 

5.  How  in  the  group  of  transactions  in  Question  3  is  it  possible  to 
make  a  group  entry  for  cash  disbursements? 

6.  What  foim  does  this  group  entry  take  in  the  cash  disbursements 
journal? 

7.  After  entering  the  cash  disbursements  in  the  cash  disbursements 
journal  currently,  how  is  the  group  entry  finally  completed? 

8.  Explain  the  uses  of  the  various  columns  in  the  cash  disbursements 
journal. 

9.  Why  are  "margins"  not  made  use  of  to  indicate  the  debit  and 
credit  elements  of  the  entry? 

10.  How  often  is  the  cash  disbursements  journal  summarized? 

11.  When  should  the  current  record  be  posted? 

12.  How  do  the  current  postings  of  debits  from  the  cash  disburse- 
ments journal  affect  the  equilibrium  of  the  ledger? 


THE  CASH  DISBURSEMENTS  JOURNAL  339 

13.  When  is  the  summary  entry  posted? 

14.  How  does  the  posting  of  the  summary  entry  affect  the  equilibrium 
of  the  ledger? 

15.  Explain  a  system  of  cross-indexing  ledger  and  journal  entries. 

16.  Explain  the  difference  between  the  cash  receipts  journal  and  the 
cash  disbursements  journal. 

17.  Compare  the  cash  disbursements  journal  with  the  sales  journal. 

18.  Give  the  principal  types  of  transactions  requiring  only  a  partial 
record  in  the  cash  disbursements  journal. 

19.  Explain  the  method  of  recording  a  transaction  involving  a  pur- 
chase discount. 

20.  What  are  the  advantages  of  using  a  cash  disbursements  journal? 

Problems 

1.  (a)  On  a  sheet  of  journal  paper  write  up  a  cash  disbursements 
journal  for  the  following  transactions: 

October,  19 — 

5.  Paid  $250  to  Cornell  Realty  Company  for  1  month's  rent. 
8.     Paid  $500  to  Leonard  Furniture  Company  on  account. 

10.     Paid  $300  salary  to  office  employees. 

15.  Paid$7ootoWilliamHaysformerchandisepurchased3odaysago. 

(b)  Summarize  and  rule  the  cash  disbursements  journal. 

2.  (a)  Write  up  a  cash  disbursements  and  a  cash  receipts  journal  for 
the  following  transactions: 

September,  19 — 

1 .     Robert  Grant  started  business  with  a  cash  investment  of  $  1 5 ,000. 

6.  Paid  $300  to  R.  B.  Frank  for  1  month's  rent. 

8.     Received  $1,500  from  G.  H.  Kelley  for  merchandise  sold  to  him 

30  days  ago. 
14.     Paid  Martin  T.  Dickens  $1,300  in  full  of  account. 

16.  Paid  taxes  for  1  year  $325. 

(b)  Summarize  and  rule  both  journals. 

(c)  Post  to  a  sheet  of  ledger  paper  the  entries  made. 

3.  (a)  From  the  following  transactions  prepare  cash  receipts  and 
cash  disbursements  journals. 

April,  19 — 

1.     Paid  $2,000  to  Hylan  Brothers  for  merchandise  purchased  10 
days  ago. 


340  FUNDAMENTALS  OF  ACCOUNTING 

10.  Purchased  furniture  and  fixtures  for  use  in  the  office  from  Drury 

Brothers,  on  account,  $1,000. 

1 1 .  Paid  R.  T.  West  cash  for  merchandise  purchased  April  i ,  invoice 

#6,  for  $500,  terms  2/10. 

12.  Paid  salaries  of  office  employees  $200. 

15.     Sold  merchandise  to  C.  E.  Nest  and  Company  for  cash  $700. 
21.     Paid  insurance  on  building  to  New  England  Insurance  Company 

$250. 
25.     Received  payment  in  full  from  M.  F.  Wise  for  merchandise  sold 

him  on  account  in  March,  $1,800. 
30.     Paid  Drury  Brothers  for  furniture  and  fixtures  purchased  April 

10,  $1,000. 
(b)  Summarize  and  rule  the  cash  receipts  and  cash  disbursements 
journals. 

4.  (a)  Write  up  general,  cash  receipts,  cash  disbursements,  sales,  and 
purchase  journals  for  the  following  transactions: 

January,  19 — 

1.  Henry  J.  Lyons  started  business  with  an  investment  of  $10,000 

cash,    $8,000   merchandise,   and    an   account    against  Miller 
Brothers  $700. 

2.  Bought  office  supplies  from  the  Mason  Stationers,  on  account, 

$400.     Bought  merchandise  from  Benjamin  Brandon  $3,000, 
terms  2/10. 

3.  Sold  merchandise  to  the  City  Garage  for  $1,500,  terms  2/10. 
8.     Received  cash  on  account  from  Miller  Brothers  $500. 

10.     Paid  $110  cash  to  Frank  H.  Green  for  an  office  desk. 

12.  Paid  Benjamin  Brandon  by  check  for  bill  of  the  2d,  $3,000,  less 

2%. 

13.  Received  payment  from  the  City  Garage  for  merchandise  sold 

January  5,  $1,500,  less  2%.     Paid  cash  for  merchandise  pur- 
chased from  Hamilton  Supply  Company  $2,000. 
15.     Paid  the  Mason  Stationers  in  full  for  merchandise  purchased 
January  2,  $400. 

17.  Sold  merchandise  to  the  City  Garage  for  cash  $600. 

18.  Bought  merchandise  from  Hamilton  Supply  Company  $3,500, 

terms  30-day  note  with  interest  at  6%. 

(b)  Summarize  and  rule  the  sales,  purchase,  and  cash  journals. 

(c)  Post  to  a  ledger  sheet  all  of  the  entries  made. 

(d)  Take  a  trial  balance. 


CHAPTER  XXII 

THE   CASH  BOOK 

Purpose  of  Chapter. — 

i.  Handling  and  control  of  cash. 

2.  Form  and  operation  of  the  cash  book. 

3.  The  short  and  over  account. 

The  Cash  Book. — In  the  explanation  given  in  Chapters  XX 
and  XXI  of  the  special  cash  journals  separate  books  were  used. 
This  was  for  the  purpose  of  fixing  clearly  in  mind  the  principles 
underlying  their  operation.  In  business  it  is  customary — al- 
though separate  journals  are  sometimes  used — to  record  cash 
receipts  and  disbursements  in  the  same  book.  This  does  not 
mean  that  the  two  kinds  of  transactions  are  mixed  together,  nor 
that  the  first  half  of  the  book  is  used  for,  let  us  say,  receipts  and 
the  latter  half  for  disbursements.  The  cash  book,  as  usually 
operated,  records  on  the  even  numbered  pages — 2,  4,  6,  etc. — 
cash  receipts,  and  immediately  opposite  on  the  odd  numbered 
pages — 3,  5,  7,  etc. — cash  disbursements.  Although  these  pages 
are  adjoining  they  nevertheless  represent  entirely  distinct 
journals. 

Debit  and  Credit  Operation  of  the  Cash  Book. — Receipts  are 
therefore  recorded  on  pages  2,  4,  6,  etc.,  of  this  book  exactly  as 
they  were  recorded  in  the  cash  receipts  journal;  and  disburse- 
ments on  pages  3,  5,  7,  etc.,  just  as  they  were  recorded  in  the 
cash  disbursements  journal.  The  debit  and  credit  analysis  is 
the  same  as  if  separate  books  were  used.  The  bookkeeper  knows 
that  the  even  numbered  pages  record  nothing  but  cash  receipts, 
and  the  odd  numbered  pages  only  cash  disbursements.     The 

341 


342  FUNDAMENTALS  OF  ACCOUNTING 

cash  book  secures  all  the  saving  of  labor  and  time  that  the 
separate  books  did.  The  only  way  in  which  the  operation  of 
the  cash  book  is  different  is  in  the  ruling  of  the  book  at  the 
time  the  summary  entry  is  made.  This  will  be  explained 
below. 

Purpose  of  the  Cash  Book. — It  is  evident  that  the  cash  book 
permits  the  manager  of  the  business  to  have  under  observation 
at  all  times  the  exact  status  of  his  cash.  He  can  see  how  his 
receipts  are  running  and  will  therefore  know  by  comparison 
with  his  disbursements  to  date  the  amount  of  cash  available 
for  use.  Accordingly,  the  cash  book  gives  him  a  control 
over  his  cash  which  the  separate  books  could  not  give  so  con- 
veniently. 

Balancing  and  Ruling. — The  amount  of  the  available  balance 
of  cash  is  an  important  piece  of  information.  It  is,  therefore, 
customary  at  the  time  the  cash  journals  are  summarized  to  indi- 
cate on  the  face  of  the  cash  book  the  amount  of  the  cash  balance. 
This  is,  of  course,  the  difference  between  the  receipts  and  the  dis- 
bursements. In  showing  this  on  the  cash  book  it  is  customary 
first  to  set  up  the  summary  entries  for  each  journal  as  was  ex- 
plained in  Chapters  XX  and  XXI.  At  the  end  of  the  week  or 
month,  in  the  cash  receipts  journal,  the  debit  item,  Cash,  Dr., 
is  set  up  (see  page  346),  and  opposite  it  the  total  amount  received, 
while  in  the  cash  disbursements  journal  the  credit  item  Cash. 
Cr.,  is  set  up,  and  opposite  it  the  total  amount  disbursed.  The 
difference  between  the  two  is  set  up  under  the  title,  Balance,  in 
the  cash  disbursements  journal  with  the  amount  directly  under 
the  amount  of  the  Cash,  Cr.  item.  This  forces  an  equilibrium, 
which  is  shown  by  ruling  off  the  two  journals  on  the  same  line 
across  the  page.  The  totals  of  both  journals,  receipts  and  dis- 
bursements, thus  appear  opposite  each  other  on  the  same  line. 
This  will  usually  leave  blank  lines  on  one  side  or  the  other  of  the 
cash  book,  because  the  number  of  transactions  is  not  the  same  for 


THE  CASH  BOOK  343 

each  journal.  The  double  ruling  separates  the  current  record 
from  the  record  of  the  next  week  or  month. 

Inasmuch  as  there  was  a  cash  balance,  that  is,  an  excess  of 
receipts  over  disbursements,  the  amount  of  this  balance  as  shown 
in  the  disbursements  journal  to  force  an  equilibrium  must  now 
be  brought  down  to  the  place  where  it  belongs  in  the  receipts 
journal  and  set  up  under  the  proper  date  as  "Balance"  with  the 
amount  entered  in  the  second  column.  This  balance  is  entered 
in  the  second  column,  for  two  reasons: 

i.  It  completely  separates  the  cash  receipts  for  the  current 
week  or  month,  shown  in  the  first  column,  from  the  balance 
brought  down.  This  is  desirable  because  the  proprietor  likes  to 
know  what  his  receipts  for  a  given  time  have  been. 

2.  Inasmuch  as  the  balance  in  the  illustration  below,  $6,438.25 
is  already  a  part  of  the  Cash  account  in  the  ledger,  because 
the  receipts  and  disbursements  of  the  previous  month  have 
been  posted  to  it,  the  item  must  not  again  be  included  for 
posting  with  the  receipts  of  the  new  month. 

The  amount  to  be  posted  for  each  succeeding  month,  after 
the  first,  is  the  receipts  of  that  month,  not  including  the  balance 
brought  over.  Were  the  balance  figure  set  up  in  the  first  column 
it  would  be  included  in  the  total  carried  into  the  second  column, 
and  so  would  have  to  be  subtracted  before  the  correct  amount  to 
be  posted  to  the  Cash  account  in  the  ledger  could  be  determined. 
There  are  usually  good  reasons  for  the  way  in  which  things  are 
done  in  books  of  account.  The  student  should  understand 
why  it  is  not  necessary  to  post  the  balance  and  why  it  is  neces- 
sary to  post  the  current  receipts  of  each  week.  In  order  to 
make  clear  the  operation  of  the  cash  book,  the  transactions  of 
the  cash  receipts  journal  as  illustrated  in  Chapter  XX  and  of 
the  cash  disbursements  journal  as  illustrated  in  Chapter  XXI, 
together  with  additional  transactions  for  the  following  month 
are  shown  in  Form  11,  the  cash  book.  The  method  of  sum- 
marization, of  balancing  and  ruling,  and  the  way  in  which  the 
balance  is  brought  down  should  be  noted  carefully  and  compared 


344  FUNDAMENTALS  OF  ACCOUNTING 

with  the  separate  cash  journals  shown  in  Chapters  XX  and 
XXI. 

Forwarding.— In  the  use  of  the  cash  book  it  frequently  be- 
comes necessary  to  carry  forward  from  the  bottom  of  one  page, 
as  from  the  bottom  of  page  2  to  the  top  of  page  4,  the  total  of 
cash  receipts  (or  cash  disbursements,  as  the  case  may  be).  This 
is  done  by  writing  on  the  last  line  of  page  2,  "Forwarded  to 
page  4,"  and  the  amount  carried  forward.  This  is  then  shown  on 
the  first  line  of  page  4  under  the  title,  "Brought  forward  from 
page  2,"  the  amount  appearing  in  the  same  relative  column  as 
on  page  2.  The  carrying  forward  of  cash  disbursements 
totals  is  done  in  the  same  way.  It  is  not  customary  to  balance 
the  cash  book  at  the  bottom  of  each  page  just  because  it  happens 
to  be  the  bottom;  the  balancing  is  done  at  regular  periods. 
When  the  totals  of  one  journal  are  carried  forward  to  another 
page  it  is  not  necessary  to  bring  forward  the  totals  of  the  other 
journal  unless  the  entries  of  that  journal  also  fill  the  page  on 
which  they  appear.  Bringing  together  on  opposite  pages  the 
record  of  receipts  and  disbursements  occurring  on  the  same  date 
is  not  necessary.  A  simple  illustration  of  forwarding  is  shown 
in  Form  n  on  pages  346-349. 

Function  as  a  Detailed  Cash  Account. — Note  that  the  cash 
book  is  handled  so  far  as  balancing  and  ruling  are  concerned  just 
like  a  ledger  account.  As  a  matter  of  fact,  if  only  one  journal 
were  used  to  record  all  transactions  with  a  complete  debit  and 
credit  analysis  of  each  transaction,  the  ledger  Cash  account  posted 
from  such  a  journal  would  be  a  duplicate  of  the  record  shown  in 
the  cash  book.  The  debit  postings  would  be  the  same  as  shown 
on  the  left-hand  side  of  the  cash  book,  and  the  credits  the  same 
as  shown  on  the  right-hand  side.  The  cash  book,  in  addition  to 
comprising  two  journals,  may  therefore  also  serve  as  a  detailed 
cash  account.  This  leads  in  some  businesses  to  the  omission  of 
a  ledger  cash  account.     This,  however,  makes  the  ledger  record 


THE  CASH  BOOK  345 

incomplete  and  out  of  balance,  so  that  when  taking  a  trial  balance 
the  cash  balance,  secured  from  the  cash  book,  must  be  added. 
It  is  better,  therefore,  to  make  use  of  a  ledger  cash  account  to 
which  will  be  posted  the  totals  of  the  summary  entries  in  the 
cash  book,  and  so  make  the  ledger  record  a  complete  record 
of  all  transactions. 

Proving  the  Cash  Journals. — The  cash  receipts  journal  and 
the  cash  disbursements  journal  are  supposed  to  be  complete 
records  of  all  cash  received  and  expended.  In  practice,  however, 
errors  and  differences  sometimes  creep  in.  Occasionally  the 
bookkeeper  either  through  oversight  or  intentionally  may  neglect 
to  record  some  cash  items.  It  therefore  becomes  necessary  to 
prove  the  record  of  cash  received  and  disbursed.  At  the  close 
of  each  day  the  actual  cash  on  hand  should  be  counted  and  this 
amount  compared  with  the  difference  between  the  day's  cash 
receipts  and  disbursements.  The  cash  book  shows  how  much 
cash  should  be  on  hand,  the  actual  count  shows  how  much  cash 
is  on  hand.  If  no  errors  have  been  made,  the  two  records 
should  agree.  Errors  in  making  change  affect  the  count;  failure 
to  record  cash  received  or  expended  will  lead  to  errors  in  the  cash 
book  record.  Naturally  the  record  of  the  count  will  govern  and 
must  be  considered  correct,  for  though  the  cash  book  record  may 
call  for  more  cash  than  the  merchant  actually  has  by  count,  he 
cannot  persuade  himself  that  he  has  that  amount  when  his  count 
shows  that  he  does  not  have  it.  Hence  the  cash  book  record 
must  be  brought  into  agreement  with  the  count  or  physical 
inventory. 

In  most  businesses  it  is  customary  to  pay  bills  by  checks  in- 
stead of  money,  because  the  check  acts  as  a  receipt  and  is  more 
convenient  to  send  through  the  mails  when  paying  persons  at  a 
distance.  This  occasionally  results  in  the  cash  disbursements 
exceeding  the  receipts,  although  the  money  payments  may  have 
been  less  than  the  cash  receipts.  If  checks  have  been  issued  the 
present  book  record  of  cash  on  hand  may  be  entered  in  the  cash 


346 


FUNDAMENTALS  OF  ACCOUNTING 


(Z^^/^^T^ 


Form  ii. 


THE  CASH  BOOK 


347 


(~~^i7-t*^^^X<^-/£,^^^^^^^^-z^/_^s 


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348 


FUNDAMENTALS  OF  ACCOUNTING 


Form  ii.     (b) 

book  daily  in  ink  or  pencil  figures,  or  a  summary  may  be  prepared, 
somewhat  as  follows : 


Daily  Cash  Summary  Data 
i.  Old  balance  of  cash 

2.  Plus  the  total  receipts 

3.  Equals  total  cash 

4.  Less  total  disbursements 

5.  Equals  present  cash  balance 

Verification 

A.  Balance  in  bank  per  check  book 

B.  Plus  cash  in  the  store: 

1.  In  cash  register 

2.  In  safe 

C.  Equals  present  cash  balance 


>i,5°o- 
400  - 

>I,QOO- 

650- 

)I,250- 


$1,077.25 

*  47-75 
125  -  172.75 


$1,250 


The  present  book  balance  of  cash  is  verified  by  counting  the 
cash  on  hand  in  the  cash  drawer,  cash  register,  and  safe,  and  add- 


THE  CASH  BOOK 


349 


-2?^^ 

ft 

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/ 



Cash  Book  {Continued) 

ing  to  this  amount  the  balance  in  the  bank  available  after 
deducting  total  checks  issued  from  total  deposits. 

The  two  special  journals — now  combined  in  the  cash  book — 
provide  the  information  in  regard  to  item  (2),  total  cash  receipts 
during  the  day,  week  or  month,  and  item  (4),  total  cash  disburse- 
ments during  the  day,  week  or  month,  thereby  making  the  verifi- 
cation of  the  book  record  by  means  of  the  physical  inventory  far 
more  convenient  than  would  otherwise  be  possible. 

The  Cash  Short  and  Over  Account. — To  bring  the  cash  book 
into  agreement  with  the  actual  amount  of  cash  on  hand,  it  will  be 
necessary  to  make  entries  in  the  cash  book.  In  order  to  force  an 
agreement  with  the  actual  cash  on  hand  if,  for  example,  the  cash 
book  record  shows  that  there  should  be  more  cash  on  hand  than 
there  is,  it  will  be  necessary  to  enter  in  the  cash  disbursements 
journal  the  difference  between  the  amount  shown  by  the  cash 
book  and  the  amount  shown  by  the  actual  count.  Since,  in 
order  to  determine  the  balance  of  cash,  the  total  of  the  cash  dis- 


350  FUNDAMENTALS  OF  ACCOUXTIXG 

bursements  journal  is  subtracted  from  the  total  of  the  cash  re- 
ceipts journal,  the  inclusion  of  this  item  as  a  disbursement  will 
make  the  balance  of  the  cash  book  less  than  it  originally  showed  by 
the  amount  of  the  difference  between  the  original  cash  book  balance 
and  the  actual  count  of  cash,  thereby  bringing  the  cash  book  record 
into  agreement  with  the  count  record.  It  is  customary  to  charge 
such  an  amount  to  an  account  called  "Cash  Short  and  Over." 

How  Shortages  Occur. — A  shortage  of  cash  may  come  about 
in  several  ways.  Where  cash  is  handled  loosely,  the  proprietor 
may  make  a  practice  of  taking  cash  from  the  cash  drawer  for  small 
purchases  and  supplies  or  to  pay  small  bills.  Unless  he  leaves  a 
record  of  these  expenditures,  or  remembers  at  the  close  of  the 
day  what  they  have  been,  the  bookkeeper  will  have  no  basis  for 
recording  the  items  on  the  cash  disbursements  journal.  This 
will  cause  the  balance  of  the  cash  book  to  be  larger  than  the  actual 
amount  of  cash  on  hand,  because  no  record  has  been  made  in  the 
cash  book  of  certain  expenditures.  Again,  in  making  change  for 
customers  slight  errors  frequently  occur.  More  cash  may  be 
returned  to  the  customer  than  should  be,,  resulting  in  a  shortage 
of  cash.  The  term ' '  cash  shortage ' '  always  means  that  the  actual 
cash  on  hand  is  short  of  the  amount  which  the  cash  book  shows 
should  be  on  hand. 

How  "  Overages  "  Occur. — It  sometimes  happens  that  in- 
stead of  being  short  the  cash  is  "over,"  meaning"  that  the  actual 
cash  count  shows  a  larger  amount  than  the  cash  book  record  calls 
for.  These  "overages"  usually  arise  in  much  the  same  way  as 
shortages.  Errors  in  making  change  where  not  enough  cash  is 
given  to  the  customer,  and  the  placing  of  cash  in  the  cash  drawer 
without  recording  its  source,  are  the  usual  causes.  To  make  the 
cash  book  agree  with  the  count  of  cash,  more  cash  must  be  shown 
in  the  record  as  having  been  received.  Hence  it  is  necessary  to 
enter  in  the  cash  receipts  journal  the  amount  of  the  difference  be- 
tween the  cash  actually  on  hand  and  the  amount  shown  by  the 


THE  CASH  BOOK  351 

cash  book.  This  is  credited  to  the  account,  Cash  Short  and  Over. 
These  adjustments  to  make  the  cash  book  agree  with  the  physical 
inventory  of  cash  are  made  before  the  cash  book  is  summarized, 
so  that  the  amount  of  the  adjustments  will  be  included  in  the 
postings  to  the  ledger  Cash  account. 

Nature  of  the  Cash  Short  and  Over  Account. — When  the 
balance  of  the  Cash  Short  and  Over  account  is  small  or  when  the 
items  posted  to  it  have  in  the  main  been  small,  it  is  customary 
to  treat  the  account  as  a  profit  and  loss  account  and,  therefore,  to 
close  it  out  when  profits  and  losses  are  summarized  at  the  end 
of  the  fiscal  period.  If  the  amount  is  large  and  appears  to  be  a 
failure  to  record  the  receipt  of  cash  from  a  customer  or  the  pay- 
ment of  a  liability  to  a  creditor,  it  is  usually  treated  as  a  balance 
sheet  item.  No  general  principle  can  be  laid  down  for  handling 
the  Cash  Short  and  Over  account.  It  is  a  matter  for  the  pro- 
prietor's judgment  each  time  the  books  are  closed.  Other  dis- 
crepancies handled  through  the  Cash  Short  and  Over  account 
are  those  arising  from  the  discovery  of  a  counterfeit  bill  or  coin 
in  the  cash,  from  the  loss  of  cash  funds  in  various  ways,  etc. 

Although  the  cash  book  is  easily  adjusted  by  charging  or 
crediting  the  Cash  Short  or  Over  account  whenever  the  cash  is 
short  or  over,  the  student  should  realize  the  seriousness  of  errors 
which  cause  a  difference  in  cash,  especially  a  cash  shortage.  The 
Cash  Short  and  Over  account  should  be  merely  a  temporary 
makeshift  to  force  the  book  records  to  agree  with  the  cash 
counted,  and  the  error  located  as  soon  as  possible;  otherwise,  if 
no  further  attention  is  paid  to  the  account,  there  will  be  great 
temptation  to  use  it  in  covering  carelessness  or  fraud.  After 
doing  his  regular  work,  therefore,  the  bookkeeper  should  exert 
every  effort  to  find  the  cause  of  the  error,  when  he  should  at  once 
make  the  necessary  counter  adjusting  entry. 

Advantages  of  the  Cash  Book. — In  addition  to  the  advantages 
of  the  cash  receipts  and  cash  disbursements  journals,  the  cash 


352  FUNDAMENTALS  OF  ACCOUNTING 

book  has  other  advantages  due  to  combining  them  in  one  book 
and  to  proving  the  cash  by  means  of  a  physical  inventory.  The 
advantages  of  the  cash  book  are  summarized  below: 

i.  Saves  time  and  space  in  recording  cash  transactions,  all 

receipts   and   disbursements   being   entered   in   more 

condensed  form. 

2.  Saves  time  in  posting,  only  one  entry  being  required  for 

the  total  of  each,  cash  receipts  and  cash  disbursements. 

3.  Saves  space  in  the  cash  account,  as  only  totals  for  weeks 

or  months  are  posted,  providing  information  in  con- 
densed form. 

4.  There  is  less  chance  for  making  errors  in  posting  because 

fewer  items  are  transferred. 

5.  Provides  for  subdivision  of  labor. 

6.  Convenient  for  reference  because  all  cash  transactions 

are  in  one  book. 

7.  Provides  convenient  means  of  obtaining  total  receipts 

and  disbursements  of  cash  for  reconciling  the  daily 
record  of  cash  with  the  actual  count. 

Questions 

1.  Why  is  the  cash  given  careful  and  constant  consideration  by  the 
manager  or  owner  of  a  business? 

2.  How  are  the  cash  disbursements  related  to  the  cash  receipts? 

3.  Why  are  the  cash  disbursements  entered  on  the  opposite  side  of 
cash  receipts  instead  of  being  mixed  up? 

4.  What  kind  of  transactions  are  entered  on  the  even  numbered  pages 
of  the  cash  book?    On  odd  numbered  pages? 

5.  How  does  the  operation  of  the  cash  book  differ  from  the  operation 
of  the  separate  cash  journals? 

6.  Give  the  advantages  of  the  cash  book  over  separate  cash  journals. 

7.  What  is  meant  by  "balancing  the  cash  book"? 

8.  How  is  the  difference  between  receipts  and  disbursements  in- 
dicated? 

9.  When  balancing  the  cash  book  what  entry  is  made  on  the  debit 
side?    On  the  credit  side? 


THE  CASH  BOOK  353 

10.  When  the  number  of  transactions  on  each  side  of  the  cash  book  are 
nut  the  same,  how  is  the  book  ruled? 

11.  Give  two  reasons  for  entering  the  balance  in  the  second  column  of 
the  cash  receipts  journal  under  the  double  ruling. 

1 2.  How  are  the  cash  book  items  transferred  from  one  page  to  another? 

13.  If  you  reach  the  bottom  of  the  page  on  the  cash  disbursements 
side  but  still  have  several  lines  open  on  the  cash  receipts  side,  how  do  you 
make  the  transfer? 

14.  (a)  Is  the  cash  book  ever  used  without  a  Cash  account  in  the 
ledger? 

(b)  Is  there  any  objection  to  it?    Why? 

15.  Why  is  it  necessary  to  prove  the  cash  journals? 

16.  How  are  the  cash  journals  proved? 

17.  Why  should  the  actual  count  of  cash  govern? 

18.  Illustrate  and  explain  a  daily  cash  summary  for  a  business  that 
pays  its  bills  by  checks. 

19.  Illustrate  and  explain  the  verification  of  the  summary  for  Question 
18. 

20.  When  is  the  Cash  Short  and  Over  account  used? 

21.  Give  some  of  the  reasons  for  the  actual  cash  not  agreeing  with  the 
cash  book  record. 

22.  When  is  the  adjusting  entry  made? 

23.  When  is  cash  short?    When  over? 

24.  What  governs  the  treatment  of  the  Cash  Short  and  Over  account 
at  the  time  of  closing  the  ledger? 

25.  Is  a  cash  shortage  a  serious  matter?     Explain. 

26.  State  all  the  advantages  of  the  cash  book. 

Problems 

1.  (a)  Write  up  the  following  transactions  in  a  cash  receipts  journal: 

January,  19 — 

10.  Received  cash  from  Jacob  Danzig,  on  account,  $800. 

22.     Received  cash  in  payment  of  Samuel  Babcock's  account  $1,200. 
31.    Received  payment  for  merchandise  sold  to  Leonard  E.  Jones  last 
month  $250. 

(b)  Summarize  but  do  not  rule  the  cash  receipts  journal. 

(c)  Write  up  the  following  transactions  in  a  cash  disbursement  journal. 

January,  19 — 

11.  Paid  salaries  in  cash  $300. 

22.    Paid  cash  on  account  to  Robert  E.  Walsh  $500. 


354  FUNDAMENTALS  OF  ACCOUNTING 

(d)  Summarize  but  do  not  rule  the  cash  disbursements  journal. 

(e)  Place  the  cash  receipts  journal  at  the  left  of  the  cash  disbursements 
journal  and  number  the  left  page  2  and  the  right  page  3.  The  two  cash 
journals  now  form  a  cash  book.  Enter  the  Balance,  close  the  cash  book, 
and  bring  down  the  Balance  for  the  next  period. 

2.  (a)  The  following  items  represent  a  continuation  of  the  transac- 
tions entered  in  Problem  1.    Use  the  same  cash  book. 

February,  19 — 

1.     Bought  office  furniture  from  Nathan  Stern  for  cash  $1 75. 
10.     Received  cash  on  account  from  P.  T.  O'Brien  $800. 
15.     Paid  cash  on  account  to  Fred  Mitchell  and  Company  $500. 
17.     Paid  cash  to  the  New  England  Insurance  Company  for  insurance 
on  merchandise  $200. 

25.  Received  payment  for  merchandise  sold  to  Eagle  Lumber  Com- 

pany 10  days  ago  $965. 

26.  Paid  telephone  bill  of  $12. 

27.  Bought  office  stationery  and  supplies  from  Polk  Brothers  for  cash 

$250. 

28.  Received  check  for  $750  from  S.  L.  Green,  paying  his  30-day  note 

without  interest. 

(b)  Summarize  the  cash  book. 

(c)  Close  the  cash  book. 

3.  (a)  Write  up  a  cash  book  for  the  following  transactions: 

May,  19 — 

10.    Thomas  Sawyer  began  business  with  a  cash  investment  of  $4,000. 
15.     Received  a  cash  refund  for  overpayment  to  Granby  and  Com- 
pany $10. 

17.  Sold  lot  adjoining  office  to  Harvey  Kellam  for  cash  $350. 

18.  $25  disappeared  from  cash  drawer  during  the  day. 

20.     Bought  an  office  safe  from  Dillon  Safe  Company  for  cash  $450. 
22.    Received  cash  for  merchandise  sold  to  H.  I.  Spencer,  May  15, 
$500. 

24.  Paid  John  Ryan  $490  in  cash  for  invoice  #27,  $500,  less  2%. 

25.  The  proprietor  drew  $200  for  personal  use. 

26.  Received  check  for  $1,000  from  B.  F.  Butler,  in  payment  of  his 

60-day  note  without  interest. 

(b)  Summarize  the  cash  book. 

(c)  Balance  and  rule  the  cash  book. 


THE  CASH  BOOK  355 

4.  (a)  Write  up  a  cash  book  for  the  following  transactions: 

June,  19 — 

1.     Cash  balance  $3,645. 

3.     T.  C.  Smith  paid  his  account  in  full,  $156. 

5.  Paid  Robert  H.  Allen  in  full  of  account,  $188. 

7.     Paid  freight  on  merchandise  received  from  Butler  and  Carson  $1 2. 
10.    Loaned  G.  W.  Botsford  $300,  and  took  his  note  for  30  days. 
12.    Payment  of  bill  for  dressmaker's  services  for  the  proprietor's  wife, 

Mrs.  H.  T.  Webb,  was  approved  for  payment  by  her  and  paid 

by  the  cashier,  $70. 
15.     Harley  Newton  paid  his  $30  bill  with  a  check  for  $35.     The 

difference  was  refunded  in  currency. 
17.     When  cash  was  counted  this  day  it  was  found  to  be  short  $10. 
20.     Paid  60-day  note  for  $200  in  favor  of  George  E.  Bender,  due 

today  with  interest,  $2. 
28.     A  check  for  $1 2  was  cashed  for  M.  E.  More,  one  of  the  employees. 
30.     Paid  Geo.  Harper  $200  for  rent  of  store  for  the  month  of  July. 

(b)  Summarize  and  close  the  cash  book. 

5.  (a)  Write  up  a  cash  book  for  the  following  transactions: 

May,  19 — 

3.  Michael  Scandello's  cash  balance  is  $2,670. 

4.  Paid  Robert  C.  Lowery  for  merchandise  purchased  in  April, 

$1,400,  less  2%.     Purchased  a  delivery  car  from  Ford  Motor 
Car  Company  for  cash  $550. 

5.  Borrowed $1,000 from  the  First  National  Bank  on  his  60-day  note. 

6.  Received  payment  for  merchandise  sold  to  Clark  Machine  Works 

on  April  20,  $500,  less  2%.    Received  cash  of  $25  from  R.  H. 
Fisher  for  rent  of  room  over  store. 

7.  Received  $10  for  sale  of  old  filing  cases  to  James  Smith  and  paid 

$65  for  new  filing  cases. 

8.  Received  payment  for  merchandise  sold  to  Moran  Lumber  Com- 

pany 10  days  ago,  $965. 

(b)  Summarize,  balance,  and  rule  cash  book. 

6.  (a)  The  following  transactions  are  a  continuation  of  Problem  5. 
Use  the  same  cash  book. 

May,  19 — 

10.  Paid  $25  for  postage  stamps. 

11.  Received  $1,150  for  merchandise  sold  to  O'Brien  and  Mosher. 


356  FUNDAMENTALS  OF  ACCOUNTING 

12.  Received  check  from  Hiram  Lockwood  for  merchandise  sold  him 

May  4,  $500,  less  2%.    Paid  on  account  to  Mitchell  and  Moffet 

$375- 

13.  Paid  insurance  to  May   15,  next  year,  $295.     When  cash  was 

counted  this  day  it  was  found  to  be  $18  less  than  the  cash  book 
showed  it  to  be. 

14.  Paid  note  held  by  Reisinger  and  Black  $750,  and  $7.50  more  for 

60  days'  interest  at  6%. 

15.  Paid  salaries  to  office  employees  $575. 

(b)  Summarize,  balance,  and  rule  cash  book. 

7.  (a)  The  following  transactions  are  a  continuation  of  Problem  6. 
Use  the  same  cash  book. 

May,  19 — 

17.  Sold  merchandise  to  B.  F.  Butler  for  cash  $1,200.     Received 

cash    refund    for    overpayment    to    Granby    and    Company 

$9- 

18.  Sold  lot  adjoining  office  to  H.  K.  Black  for  cash  $350. 

19.  F.  S.  Davison  paid  his  $20  bill  with  a  check  for  $25.    The  differ- 

ence was  refunded  in  currency. 

20.  Paid  Model  Safe  Company  $450  for  office  safe.    Received  cash 

from  D.  E.  Browning  for  note  and  interest;  face  of  note  $300; 
interest  $4.75. 

21.  Michael   Scandello,    the   proprietor,    drew   $500    for    personal 

use. 

22.  $10  disappeared  from  cash  drawer  during  the  day. 

23.  A  check  for  $20  was  cashed  for  Charles  Smith,  one  of  the  em- 

ployees.   Paid  for  merchandise  purchased  from  Reynolds  and 
Company,  May  15,  $800,  less  2%  discount. 

(b)  Summarize,  balance,  and  rule  cash  book. 

8.  Open  a  cash  account  on  a  sheet  of  ledger  paper  and  post  cash  items 
for  Problems  5,  6,  and  7. 

9.  (a)  Record  the  following  transactions  using  general,  sales,  and 
purchase  journals  and  cash  book. 

October,  19 — 

1.  Albert  A.  Williams  started  business  at  2025  Main  St.,  Detroit, 
Mich.,  investing  $10,000  in  cash  and  $1,500  in  furniture  and 
fixtures.  Bought  merchandise  $600  from  Richard  H.  Allen  on 
30-day  note  with  interest  at  5%. 


THE  CASH  BOOK  357 

3.     Bought  merchandise  from  F.  A.  Ross,  1 10  Penn  St.,  City,  amount- 
ing to  $5,000,  terms  2/10,  n/30. 
5.     Sold  merchandise  to  D.  K.  Lee,  500  Fourth  Ave.,  City,  amounting 

to  $1,800,  terms  n/30. 
7.     Paid  rent  of  building  for  month  of  October  $300. 
10.     Sent  check  to  F.  A.  Ross  paying  for  purchase  of  the  3d.    Amount 

of  check  $4,900,  discount  $100. 
13.     Sold  merchandise  to  John  K.  Scott,  610  State  St.,  City,  for  cash 
$1,200. 

17.  Bought  merchandise  from  F.  A.  Ross  for  cash  $800. 
20.     When  cash  was  counted,  it  was  found  to  be  over  $25. 

26.  The  proprietor  purchased  $300  household  furniture  for  his  home 
from  the  Warner  Furniture  Company,  12 15  Lake  St.,  City, 
and  gave  in  payment  an  order  on  his  store  which  was  paid 
in  cash. 

30.  Paid  salaries  of  office  employees  $500. 

31.  Paid  his  30-day  note  for  $600  held  by  Richard  H.  Allen  with 

interest  at  5%.    Total  amount  $602.50. 

(b)  Summarize  and  close  the  sales  and  purchase  journals  and  the  cash 
book. 

(c)  Post  all  of  the  entries. 

(d)  Take  a  trial  balance. 

10.  (a)  The  following  transactions  are  a  continuation  of  Problem  q. 
Use  the  same  journals. 

November,  19 — 

1.     Bought  merchandise  from  Lewis  and  Gray,  1825  Summit  St., 
Toledo,  Ohio,  amounting  to  $6,000,  terms  one-third  in  cash, 
one-third  on  a  60-day  note,  and  the  remainder  on  account. 
5.     Sold  merchandise  to  Rand  Brothers,  Lansing,  Mich.,  for  $4,000; 

one-half  was  paid  in  cash  and  one-half  by  a  30-day  note. 
7.     Paid  rent  of  building  for  month  of  November  $300. 
10.     A  counterfeit  $5  bill  was  found  among  the  cash. 
12.     Purchased  a  delivery  car  from  Ford  Motor  Car  Company,  City, 

on  account,  $550. 
15.     Received  payment  from  D.  K.  Lee  for  merchandise  sold  to  him 
on  October  5.    Check  was  for  $1,900  which  was  credited  to  his 
account  and  our  refund  check  of  $100  mailed  to  him. 

18.  Sold  merchandise  to  John  K.  Scott  amounting  to  $2,000,  terms 

n/30. 
20.    The  proprietor  made  an  additional  investment  of  $2,000. 


358  FUNDAMENTALS  OF  ACCOUNTING 

29.  Paid  salaries  of  office  employees  $500. 

30.  Cash  was  short  $5. 

(b)  Summarize  and  rule  the  sales  and  purchase  journals  an  i  the  cash 
book. 

(c)  Post  all  of  the  entries. 

(d)  Take  a  trial  balance. 


CHAPTER  XXIII 
THE   GENERAL  JOURNAL 

Purpose  of  Chapter. — 

i .  Content  and  use  of  the  general  journal. 
2.  Posting  hints. 
.  3.  Special  transactions. 

Basis. — The  student  may  inquire  as  to  what  principle  governs 
the  creation  of  special  journals,  that  is,  in  a  given  business  how 
many  of  these  journals  should  there  be?  In  analyzing  the  trans- 
actions of  a  business  over  a  period,  for  example,  a  trading  busi- 
ness, the  student  has  learned  that  the  transactions  occurring  most 
frequently  are :  the  purchase  of  merchandise,  the  sale  of  merchan- 
dise, the  receipt  of  cash,  and  the  disbursement  of  cash.  These 
accordingly  give  rise  to  the  names  of  the  journals  in  which  it  is 
customary  to  record  them.  We  have,  therefore,  in  such  a  busi- 
ness, a  sales  journal,  a  purchase  journal,  a  cash  receipts  journal, 
and  a  cash  disbursements  journal.  The  same  kind  of  analysis 
must  be  made  to  determine  for  every  business  the  special  journals 
that  can  be  used  to  advantage.  Therefore,  the  only  principle 
that  can  be  stated  covering  this  point  is  that  the  number  of 
transactions  of  the  same  kind  occurring  in  a  given  business  must 
determine  the  number  of  special  journals.  For  example,  if,  as 
in  the  case  of  an  automobile  trading  agency,  it  is  customary  to 
accept  many  notes  from  customers  it  would  be  a  great  saving  of 
labor  to  use  a  notes  receivable  journal.  Again,  as  in  the  real 
estate  rental  business,  where  many  transactions  involving  the 
charging  of  rents  to  tenants  take  place,  it  would  be  advan- 
tageous to  have  a  rent  journal. 

359 


360  FUNDAMENTALS  OF  ACCOUNTING 

Content  of  the  General  Journal. — It  must  not  be  understood 
by  what  has  been  said  above  that  there  is  one  journal  in  which  all 
transactions  are  recorded  and  that  in  addition  to  it  there  are  the 
special  journals.  Such  a  method  not  only  would  not  save  labor 
but  would  make  labor.  The  first  and  only  record  of  each  group 
of  transactions  is  made  in  its  special  journal .  There  are  naturally 
miscellaneous  transactions  which  do  not  fall  under  any  of  these 
groups.  These  must  be  recorded  in  the  journal,  that  is,  the  kind 
of  journal  first  introduced  in  Chapter  XIII.  In  such  a  journal  both 
the  debit  and  credit  items  of  each  transaction  must  be  set  up, 
because  it  is  not  limited  to  any  particular  class  of  transactions. 
Therefore  it  should  now  be  evident  that  there  is  no  longer  one 
journal  in  which  all  the  transactions  are  entered,  but  that  the 
special  journals  and  the  miscellaneous  journal,  all  taken  together^ 
comprise  the  journal  record  of  the  business. 

The  student  has  noted  that  a  complete  record  of  business 
transactions  requires  only  a  journal  and  a  ledger.  He  has  seen 
that  this  journal  record  may  for  the  sake  of  saving  labor  be 
broken  into  as  many  separate  journals  as  can  be  used  advan- 
tageously. Therefore  it  is  apparent  that  no  general  rule  can  be 
laid  down  governing  the  content  of  the  general  journal.  This 
must  depend  on  the  number  of  special  journals  in  use  in  any 
given  business.  The  general  journal  will  consequently  not  have 
a  uniform  content  in  all  cases.  The  only  working  principle  that 
can  be  stated  is  that  those  transactions  for  which  special  journals 
are  not  provided  will  be  recorded  in  the  general  journal.  Being 
a  miscellaneous  or  sundry  journal,  its  name,  "  General  Journal," 
is  appropriate. 

Explanatory  Matter. — In  the  special  journals  there  is  little 
need  for  explanation,  because  the  very  fact  that  a  transaction  is 
recorded  in  the  special  journal  indicates  its  nature.  Only  neces- 
sary details,  such  as  terms  of  sale,  or  terms  of  purchase,  etc., 
should  appear  there.  In  the  general  journal,  however,  where 
many  different  kinds  of  transactions  are  recorded,  a  full  explana- 


THE  GENERAL  JOURNAL  361 

tion  of  each  transaction  is  necessary,  so  that  at  a  later  date, 
after  the  details  have  been  forgotten,  complete  and  intelligent 
understanding  of  the  transaction  can  be  secured  from  the  record. 
The  explanatory  matter  should,  therefore,  give  all  the  essential 
details  of  the  transaction.  The  explanation  should  not  be  long 
or  wordy,  but  concise  and  brief.  In  case  of  doubt,  however,  the 
student  should  always  err  on  the  side  of  fulness,  rather  than  of 
brevity. 

Preventing  Errors  in  Posting. — Bookkeepers  have  found  that 
many  of  the  errors  in  the  ledger  come  from  postings  wrongly  made 
from  the  general  journal.  Psychologists  say  this  results  from  the 
inability  of  the  mind  to  pass  quickly  from  one  kind  of  work  or 
idea  to  another.  When  a  bookkeeper  posts  a  debit  from  the 
general  journal,  the  record  in  the  ledger  must,  of  course,  be  made 
to  the  debit  side  of  the  account.  If  he  immediately  follows  this 
debit  posting  by  posting  the  credit  side  of  the  transaction,  he 
must  consciously  pass  from  the  debit  side  of  one  ledger  account 
to  the  credit  side  of  another  ledger  account.  When  doing  this, 
particularly  in  a  rush  of  work,  it  is  easy  to  forget  to  change  from 
one  side  of  the  ledger  to  the  other,  thus  causing  errors  in  the 
ledger. 

Bookkeepers  have  found  that  such  errors  can  largely  be  pre- 
vented by  posting  all  the  debits  before  posting  any  credits.  In 
this  way  the  constant,  conscious  effort  of  changing  from  one  side 
of  the  ledger  to  the  other  is  eliminated. 

In  a  large  measure  this  avoids  errors  in  posting,  a  very  impor- 
tant consideration  as  we  shall  see  later,  when  discussing  methods 
of  detecting  errors.  As  with  sickness,  so  with  ledger  postings, 
prevention  is  better  than  cure. 

Time  of  Posting. — There  is  no  fixed  practice  as  to  the  time  for 
posting  the  general  journal.  Where  it  records  adjustments  with 
customers  and  creditors  because  of  returned  goods,  allowances, 
etc.,  it  is  best  to  post  it  at  the  close  of  each  day.     In  many  cases 


362  FUNDAMENTALS  OF  ACCOUNTING 

it  is  most  convenient  to  post  the  previous  day's  records  in  the 
moaning  while  the  mail  is  being  sorted  and  before  work  comes  in 
from  other  sources.  This  leaves  part  of  the  morning  and  all 
the  afternoon  free  for  recording  transactions. 

The  time  for  posting  is  a  matter  of  office  organization;  a  con- 
venient time  in  one  office  might  not  be  practicable  in  another. 
The  student  should  make  it  a  general  rule  to  keep  his  posting 
right  up  to  date.  In  this  way  he  is  sure  that  his  ledger  accounts 
with  customers  and  creditors  always  show  the  exact  amount  due. 
Since  posting  is  a  mechanical  operation,  odd  minutes  may  be 
utilized  for  posting  from  the  various  journals.  Every  item 
posted  represents  a  task  completed  and  correspondingly  reduces 
the  amount  of  posting  to  be  done  at  the  time  the  special  journals 
are  summarized. 

Opening  Entry  Containing  Cash. — The  student  is  familiar 
with  opening  entries  containing  several  assets  and  liabilities  and 
understands  that  their  debits  and  credits  comprise  the  three 
elements  of  a  balance  sheet,  namely,  assets,  liabilities,  and  capital. 
The  proprietor  will  usually  have  some  cash  at  the  time  of  begin- 
ning operations.  Cash,  of  course,  is  an  asset  and  will  appear 
among  the  debits  to  be  entered  in  the  ledger.  Two  courses  are 
open  if  a  cash  book  is  in  use:  (1)  All  assets  other  than  cash  may 
be  debited  in  the  general  journal,  with  a  corresponding  credit  to 
Capital  account.  If  the  cash  is  entered  in  the  cash  book — receipts 
side — the  effect  will  be  a  debit  to  cash  and  a  credit  to  Capital. 
The  two  credits  (general  journal  and  Cash  receipts)  will  then 
provide  the  total  credit  to  the  Capital  account,  making  this  a 
typical  split  transaction.  (2)  It  is  often  desired  to  list  all  the 
assets  (including  Cash)  in  the  general  journal  upon  the  opening  of 
business.  If  this  is  done,  it  will  provide  the  full  credit  to  the 
Capital  account.  However,  with  a  cash  book  in  use,  the  item 
of  Cash  must  also  be  entered  in  the  cash  book — receipts  side — 
just  as  before.  This,  of  course,  duplicates  the  entry  made  in  the 
general  journal,  because  the  amount  of  cash  will  be  included  in  the 


THE  GENERAL  JOURNAL 


363 


total  cash  receipts  and  the  Capital  account  will  be  credited  just 
as  in  (1).  To  prevent  this  duplication  of  debits  to  Cash  from 
reaching  the  ledger,  check  (v)  the  Cash  debit  in  the  general 
journal,  and,  since  the  Capital  account  has  been  credited  in  the 
general  journal  for  the  full  amount  of  the  investment  (including 
cash),  check  (y)  the  Capital  account  credit  on  the  receipts  side 
of  the  cash  book. 

To  illustrate  the  manner  of  recording  the  opening  entry  when 
a  cash  book  is  used  we  shall  show  the  same  opening  entry  recorded 
under  both  plan  1  and  plan  2. 

Example:  Assume  that  Edward  Wright  began  business  September  7, 
19 — ,  with  cash  $2,000,  merchandise  $7,000,  and  furniture  and  fixtures  of 
$1,000. 

Omitting  explanations,  the  entries  to  record  this  information 
would  be  as  follows : 


Plan  1 


General  Journal 


September  7,  19— 
Merchandise 
Furniture  &  Fixtures 

Edward  Wright,  Capital 


7,000 
1,000 


8,000 


Cash  Book — Receipts  Side 


19— 
Sept. 


EdwardWright,C/a 


investment.  See  J.  p.  1 


2,000 


Plan  2 


General  Journal 


September  7,  19 — 
Cash  (See  C.  B.  2) 
Merchandise 
Furniture  &  Fixtures 

Edward  Wright,  Capital 


V 

2,000 

7,000 

- 

1,000 

10,000 

364 


FUNDAMENTALS  OF  ACCOUNTING 
Cash  Book— Receipts  Side 


19— 
Sept. 


Edward  Wright,  C/a 


investment.  See  J.  p.  1 


2,000 


If  the  assets  with  which  the  proprietor  begins  business  consist 
of  nothing  but  cash,  it  is  convenient  to  record  the  item  on  the 
receipts  side  of  the  cash  book  only. 

Transactions  Involving  Three  Journals. — The  split  transaction, 
involving  the  use  of  two  journals,  was  discussed  and  illustrated 
in  Chapter  XX  and  in  the  example  just  above.  Sometimes,  where 
special  journals  are  in  use,  a  transaction  may  involve  three  journals. 

Example:  Suppose  that  on  September  10,  19 — ,  you  sold  to  Frank 
Morrison  invoice  #27,  $1,200,  terms  cash  $400,  30-day  note  $600,  and 
balance  on  account. 

The  full  record  will  appear  in  three  journals,  viz.,  sales  journal, 
cash  book— receipts,  and  general  journal. 


Sales  Journal 


(Page  17) 


Date 

No. 

19— 
Sept. 

10 

27 

Customer 


Frank  Morrison 


Address 


City 


Terms 


cash  $400;  30  da. 
note  $600 ;  bal.  on  a/c 


92 


Amount 


Cash  Book — Receipts 


1,200 


(Page  14) 


19— 

Sept 


Frank  Morrison 


on  a/c  sale  #27 


General  Journal 


92 


400 


(Page  8) 


September  10,  19 — 
Notes  Receivable 
Frank  Morrison 
Rec'd  30-day  note  on  a/c  of  sale  #27 


92 


600 


600 


THE  GENERAL  JOURNAL 


365 


The  following  account  of  Frank  Morrison  shows  the  full  effect 
of  the  transaction. 


Frank  Morrison 


(Page  92) 


19— 

19— 

Sept. 

10 

S 

17 

1,200 

Sept. 

10 
10 

C 
J 

14 

8 

400 
600 

- 

Questions 

1.  In  a  given  business  what  governs  the  number  of  special  journals? 

2.  Name  some  special  journals  other  than  sales,  purchases,  and  cash. 

3.  What  is  a  general  journal? 

4.  Upon  what  does  the  content  of  the  general  journal  depend? 

5.  In  what  way  does  the  recording  of  explanatory  matter  in  the  general 
journal  differ  from  the  recording  of  such  matter  in  the  special  journals? 

6.  Is  the  general  journal  summarized?     Why? 

7.  What  is  the  best  method  of  posting  the  general  journal?     Why? 

8.  Upon  what  does  the  time  of  posting  depend? 

9.  What  is  the  advantage  of  keeping  the  posting  up  to  date? 

10.  Explain  two  plans  for  recording  the  "opening  entry"  containing 
cash  when  a  cash  book  is  used. 

1 1.  If  the  proprietor  begins  business  with  nothing  but  cash,  how  should 
it  be  recorded? 

12.  Give  an  illustration  of  a  sales  transaction  requiring  the  use  of  two 
journals.    Three  journals. 

13.  Give  an  illustration  of  a  purchase  transaction  requiring  the  use  of 
two  journals.    Three  journals. 

14.  Assuming  the  use  of  a  sales  journal,  purchase  journal,  and  cash 
book,  name  and  give  the  entry  or  entries  for  five  different  types  of  trans- 
actions that  would  be  recorded  in  the  general  journal. 


Problems 

1.  Write  up  a  general  journal  for  the  following  transactions  assuming 
the  use  of  a  sales  journal,  purchase  journal,  and  cash  book: 

October,  19 — 

1.  Gave  our  note  to  L.  T.  Nates  for  $3,000. 

2.  Returned  purchases  to  Kelley-Springfield  Company  $250.  ■ 


366  FUNDAMENTALS  OF  ACCOUNTING 

3.  Samuel  Barnard  advised  us  that  some  of  the  goods  purchased 

from  us  were  damaged  in  transportation.  Knowing  his  word 
could  be  depended  upon,  we  allowed  him  $25,  without  return 
of  the  goods. 

4.  We  had  an  open  account  against  D.  C.  Copperfield  of  $1,500, 

which  he  paid  by  giving  us  his  60-day  note. 

5.  Gordon  and  Hauser  returned  merchandise  to  us  as  being  unsatis- 

factory, $75. 

6.  August  Straub  returned  our  statement  of  October  1  for  $200,  stat- 

ing he  paid  his  account  in  September.  Upon  investigation  we 
found  an  item  of  $200  charged  to  his  account  which  should  have 
been  charged  to  Thomas  Straus. 

2.     (a)  Enter  the  following  transactions  for  a  chemical  supply  busi- 
ness using  sales  and  purchase  journals,  cash  book,  and  general  journal. 

September,  19 — 

1.  Abraham  Jones  started  business  with  cash  $10,000;  merchandise 

$6,000;  and  an  account  against  W.  R.  Littell,  $600. 

2.  Bought  merchandise  from  C.  N.  Young  for  cash  $3,000. 

3.  Sold  merchandise  to  Ernest  Noles  $1,200,  terms  2/10,  n/30. 
5.     Paid  cash  $250  to  M.  L.  Hicks  for  1  month's  rent. 

8.     Sold  merchandise  to  Harry  Brown  $700,  terms  2/10,  n/30. 
10.     Purchased  merchandise  from  C.  N.  Young  $4, 200,  terms  n/30. 
18.     Received  check  from  Ernest  Noles  paying  for  invoice  of  the 

3d,   $1,200,    with    2%    discount    deducted.     Check  was  for 

$1,176. 
21.     Sold  merchandise  to  Harry  Brown,  $1,500,  terms  2/10,  n/30. 

Received  from  W.  R.  Littell  a  30-day  note  for  $600  in  full  of 

account. 

25.  Sold  old  packing  cases  to  Norris  and  Gates  for  cash  $6. 

26.  Purchased  merchandise  from  C.  N.  Young,  $1,500,  terms  n/30. 
30.     Paid  salaries  to  office  employees  in  cash,  $400. 

(b)  Summarize  the  special  journals  and  balance  (close)  the  cash  book. 

(c)  Post  all  of  the  entries  on  ledger  paper. 

(d)  Take  a  trial  balance. 

3.     (a)  Journalize  the  following  transactions  using  general,  sales, 
and  purchase  journals  and  cash  book. 

December,  19 — 

1.    John  Henry  French  started  a  cotton  goods  business  with  $10,000 
in  cash.    He  owed  C.  F.  Crooks,  on  account, 


THE  GENERAL  JOURNAL  367 

2.     Bought  merchandise  from  D.  C.  Masters  $3,500,  terms  2/20, 
n/30. 

4.  Sold  merchandise  to  H.  C.  House  $1,000,  terms  2/10,  n/30. 

5.  Sold  merchandise  to  L.  Z.  Emmert  $1,400,  terms  n/10. 
7.     Paid  C.  F.  Crooks  in  full  of  account  $900  in  cash. 

9.     Returned  merchandise  to  D.  C.  Masters  as  being  unsatisfactory 

$500. 
12.     Received  cash  from  H.  C.  House  paying  his  account  of  $1,000, 

less  2%  discount. 
14.     Paid  on  account  of  daughter's  tuition  at  Vassar  College  $200. 
18.     Sold  merchandise  to  J.  G.  Webster,  on  account,  $800. 
20.     Bought  merchandise  from  D.  C.  Masters  $2,000,  terms  2/10, 

n/30. 
23.     Paid  account  of  D.  C.  Masters  $3,000,  less  2%. 
27.     Paid  gas  bill  in  cash  $12. 
31.     L.  Z.  Emmert  paid  one-half  of  his  account  in  cash  $700,  and  gave 

a  30-day  note  for  the  remaining  $700. 

(b)  Summarize  the  special  journals  and  balance  the  cash  book. 

(c)  On  ledger  paper  post  all  of  the  entries. 

(d)  Take  a  trial  balance. 

4.     (a)  Journalize  the  following  transactions,  using  general,  sales  and 
purchase  journals,  and  cash  book. 

January,  19 — 

1.  H.  W.  Speer  began  a  business  dealing  in  gas  and  electric  fixtures 

with  cash  $4,000;  merchandise  $5,200;  account  against  John  N. 
Avery  $200;  owed  to  B.  C.  Murdock  on  note  $1,200. 

2.  Sold  merchandise  to  Pickering  Brothers,  on  account,  $1,400, 

terms  2/40,  n/60. 

3.  Received  check  from  John  N.  Avery  in  full  of  his  account,  $200. 

Bought  of  H.  D.  Folsom  $1,500  in  merchandise,  terms  2/10, 
n/30. 

4.  Paid  drayage  bills  on  incoming  merchandise  in  cash  $24. 

5.  Sold  merchandise  to  W.  R.  Baxter,  on  account, $2, 250,  terms  2/10, 

n/30. 

6.  Received  a  30-day  note  from  Pickering  Brothers  for  invoice  of 

1/2/ — ,  $1,400,  less  2%. 

8.  Cash  short  $5. 

9.  Paid  salary  to  M.  F.  Friend  $50,  Mary  K.  Roper  $25,  L.  T.  Burk 

$30. 
10.    Bought  merchandise  from  Davis  Patterson  $750,  terms  n/30. 


368  FUNDAMENTALS  OF  ACCOUNTING 

ii.  Received  check  from  W.  R.  Baxter  for  invoice  of  1/5/ — ,  $2,000, 
less  2%.  Remainder  of  goods  returned  as  not  being  needed, 
$250.     Total  of  check  $1,960. 

12.  Paid  $10  for  postage  stamps.  Gave  H.  D.  Folsom  check  for 
$1,470  in  full  for  invoice  of  1/3/ — . 

(b)  Summarize  the  special  journals  and  balance  the  cash  book. 

(c)  Using  two  pages  of  ledger  paper,  post  all  of  the  entries. 

(d)  Take  a  trial  balance. 

(e)  Assuming  that  all  the  expense  assets  have  been  consumed  and  that 
there  is  a  merchandise  inventory  of  $3,500,  prepare: 

1.  Balance  sheet 

2.  Statement  of  profit  and  loss 

(f)  Write  the  closing  journal  entries  and  post. 

(g)  Close  the  ledger  and  take  post-closing  trial  balance. 

5.  (a)  Journalize  the  following  transactions,  using  general,  sales,  and 
purchase  journals,  and  cash  book. 

July,  19— 

1.  L.  C.  Downs  began  a  retail  hardware  business  with  cash  $2,500, 

merchandise  $4,000,  furniture  and  fixtures  $1,000.  Bought 
merchandise  from  Joseph  Whitson$5,2oo,  terms  n/60.  Bought 
office  safe  from  Ironclad  Safe  Company  for  cash  $500. 

2.  Received  cash  $45  for  an  old  office  desk. 

3.  Sold  merchandise  to  Edward  Mitchell  $3,500,  terms  2/10,  n/30. 

4.  Bought  10  shares  of  Lightning  Express  Company  Stock  at  $102 

for  cash. 

5.  Lent  cash  to  Calvin  Storms  on  his  30-day  note  $500. 

6.  Sold  merchandise  to  James  Hadigan  and  Sons,  on  account, 

$800. 

7.  Bought  merchandise  from  Simkins  Hardware  Company,  giving 

10-day  note  in  payment,  $5,000. 

8.  James  Hadigan  and  Sons  advised  that  the  goods  billed  to  them  on 

July  6  amounting  to  $800  were  not  purchased  by  them.     Goods 

should  have  been  billed  to  J.  M.  Haddon  and  Company. 
10.     Received  payment  from  Edward  Mitchell  for  invoice  of  July  3, 

$3,500,  less  2%. 
1 2 .     Received  60-day  note  for  $808  from  J.  M .  Haddon  and  Company, 

paying  their  account  of  $800  with  interest  of  $8  included  in  face 

of  note. 
15.    Paid  clerks'  salaries  in  cash,  $300. 


THE  GENERAL  JOURNAL  369 

(b)  Summarize  the  special  journals  and  balance,  or  close,  the  cash  book. 

(c)  Using  two  pages  of  ledger  paper,  post  all  of  the  entries. 

(d)  Take  a  trial  balance. 

(e)  With  the  following  additional  information  prepare: 

1.  Balance  sheet 

2.  Profit  and  loss  statement 

Additional  information:  merchandise  inventory  $6,300;  all  expense 
assets  have  been  consumed,  together  with  $150  accrued  rent. 

(f)  Write  the  closing  journal  entries  and  post. 

(g)  Close  the  ledger  and  take  a  post-closing  trial  balance. 

6.  (a)  Journalize  the  following  transactions  using  general,  sales,  and 
purchase  journals,  and  cash  book. 

February,  19 — 

1.  John  C.  Carruthers  who  is  engaged  in  the  furniture  business  has 

cash  of  $5,000;  merchandise  $7,200;  and  furniture  and  fixtures 
for  use  in  his  office  $1,500;  Newton  T.  Baker  owes  him,  on 
account,  $1,500.  He  owes  Northern  Furniture  Company,  on 
account,  $1,200. 

2.  Purchased  merchandise  from  Forbell  Brothers  $3,800,  terms  2/10, 

n/60.  Gave  Brown  and  Green  check  for  rent  for  February  $400. 

3.  Received  cash  from  Newton  T.  Baker,  on  account,  $750. 

5.     Paid  his  account  with  Northern  Furniture  Company  $1,200,  less 
2%  cash  discount. 

7.  A  counterfeit  $10  bill  was  found  in  the  cash  register. 

8.  Paid  tailor's  bill  for  Mr.  Carruthers  $138. 

9.  Paid  salaries  of  office  employees  $400. 

10.     Sold  merchandise  to  Colonial  Sales  Company  $3,950,  terms  2/10, 
n/60 

12.  Paid  account  with  Forbell  Brothers  for  bill  of  2/2/ — .    Amount  of 

check  $3,724- 

13.  Purchased  merchandise  from  Zuckerman  and  Berger  for  cash 

$2,250. 

14.  Received  check  for  the  balance  of  Mr.  Baker's  account,  $750. 

Paid  Howe  and  Company  by  check  for  rent  for  the  month  of 
February  $400. 

(b)  Summarize  the  special  journals  and  balance  the  cash  book. 

(c)  Post  to  the  ledger.  Allow  lines  as  follows:  Cash  4,  Merchandise 
Inventory  5,  Furniture  and  Fixtures  5,  Newton  T.  Baker  5,  Northern 
Furniture  Co.  3,  Merchandise  Purchases  4,  Forbell  Bros.  4,  Sales  Discount 


370  FUNDAMENTALS  OF  ACCOUNTING 

5,  Cash  Short  and  Over  3,  Purchase  Discount  4,  Salaries  6,  Merchandise 
Sales  4,  Colonial  Sales  Co.  4,  Zuckerman  and  Berger  4,  Rent  4,  Merchan- 
dise Trading  15,  Profit  and  Loss  10,  John  C.  Carruthers,  Personal  6,  John 
C.  Carruthers,  Capital  8. 

(d)  Take  a  trial  balance. 

(e)  With  the  following  additional  information  prepare: 

1.  Balance  sheet  for  February  14,  19 — . 

2.  Statement  of  profit  and  loss 

Additional  information:  merchandise  inventory  $9,300;  rent  prepaid 
$200;  furniture  and  fixtures  decreased  $30  on  account  of  use. 

(f)  Write  the  closing  journal  entries  and  post. 

(g)  Close  the  ledger  and  take  post-closing  trial  balance. 

7.  (a)  The  following  transactions  represent  a  continuation  of  Prob- 
lem 6.     Use  the  same  journals  and  cash  book. 

February,  19 — 

16.  Sold  merchandise  to  Eagle  Furniture  Store  $3,500,  terms  2/10, 

n/60. 

17.  Bought  merchandise  from  Forbell  Brothers  $3,700,  terms  2/10, 

n/30. 

19.  Paid  cash  for  telephone  service  $15. 

20.  Received  check  from  Colonial  Sales  Company,  paying  for  sale  of 

2/10/—,  $3,950.  less  2%. 

22.  Purchased  merchandise  from  Zuckerman  and  Berger  $2,000, 

terms  n/30. 

23.  Paid  salaries  of  office  employees  $300.     Received  check  from 

Eagle  Furniture  Store  for  sale  of  2/16/ — ,  less  2%. 

24.  Sold  merchandise  to  Colonial  Sales  Company  $4,000  and  took 

their  30-day  note  in  payment  therefor. 

26.  Paid  Forbell  Brothers  by  check  for  invoice  of  2/17/ — ,  less  2%. 

27.  Mr.  Carruthers  took  furniture  amounting  to  $800  for  use  in  his 

home. 

28.  Donated  $75  to  American  Red  Cross. 

(b)  Summarize  the  special  journals  and  balance  the  cash  book. 

(c)  Post  to  the  same  ledger  as  used  in  Problem  6.  Open  the  following 
additional  accounts:  Eagle  Furniture  Co.  3,  Notes  Receivable  3,  Telephone 
3,  Donations  3. 

(d)  Take  a  trial  balance. 

(e)  Additional  information:  Merchandise  inventory  $8,500.  All  ex- 
pense assets  were  consumed.  Furniture  and  fixtures  decrease  in  value  $30. 
Accrued  salaries  $100. 


THE  GENERAL  JOURNAL  37 1 

Prepare: 

1.  Balance  sheet 

2.  Statement  of  profit  and  loss 

(f)  W.-ite  the  closing  journal  entries  and  post. 

(g)  Take  post-closing  trial  balance. 

(h)  Make  comparative  balance  sheet  for  February  14  and  February 
28,  19—. 

8.  (a)  Enter  the  following  transactions,  using  purchase  and  sales 
journal,  cash  book,  and  general  journal. 

October,  19 — 

1.  Harvey  C.  Bowser  started  a  china  and  glassware  business  with 
the  following  assets  and  liabilities:  cash  $5,000,  land  and  build- 
ing $20,000,  furniture  and  fixtures  $1 ,000,  merchandise  $10,000, 
Harry  N.  Sheffield  owes  on  account  $1,600,  Frank  L.  Davis 
owes  on  a  60-day  note  $1,200,  owed  to  John  D.  Meyers  and 
Company,  on  account,  $2,000. 

4.  Paid  Cohen  and  Company  $60  for  office  supplies  and  stationery. 

5.  Sold  merchandise  to  Taber  and  Company  for  $5,200,  terms  2/10, 

n/60. 
7.     Sold  merchandise  to  Harry  N.  Sheffield  $4,000,  terms  2/10^/30. 
10.     Received  payment  from  Frank  L.  Davis  for$i,2oo  note  due  today 

with  5%  interest.    Total  $1,210. 
12.     Bought  merchandise  from  John  D.  Meyers  and  Company  $2,500, 

terms  2/20,  n/60. 
15.     $200  was  stolen  from  the  cashier  while  he  was  on  his  way  to  the 

bank.  Received  check  for  $5,096  from  Taber  and  Company  for 

sale  of  10/5/ — ,  $5,200,  less  2%. 
t  7 .     Paid  Joh n  D .  Meyers  and  Company  for  item  of  October  1 ,  $ 2 ,000 

less  2%  cash  discount. 
27.     While  Mrs.  Bowser  was  out  of  the  city  she  telegraphed  for  some 

money.    The  cashier  sent  her  $150. 

30.  Paid  salaries  to  office  employees  $400,  to  salesmen  $300  for 

salaries  and  $200  for  traveling  expenses. 

31.  Some  of  the  merchandise  purchased  from  John  D.  Meyers  and 

Company  on  October  1 2  was  damaged,  for  which  they  made  an 
allowance  of  $100  to  us. 

(b)  Summarize  the  special  journals  and  balance  the  cash  book. 

(c)  Post  to  the  ledger.    Two  pages  of  ledger  paper  are  required.    Open 
accounts  and  allow  the  following  number  of  lines:  Cash  3,  Merchandise 


372  FUNDAMENTALS  OF  ACCOUNTING 

Inventory  3,  Furniture  and  Fixtures  5,  Land  and  Building  3,  Notes  Receiv- 
able 3,  Harry  N.  Sheffield  3,  Taber  and  Company  3,  John  D.  Meyers  and 
Co.  4,  Merchandise  Purchases  4,  Merchandise  Sales  3,  Sales  Discount  3, 
Salaries  4,  Salesmen's  Traveling  Expenses  3,  Purchase  Discount  3,  Rent 
Income  3,  Harvey  C.  Bowser,  Drawing  3,  Harvey  C.  Bowser,  Capital  6, 
Merchandise  Trading  8,  Profit  and  Loss  8,  Taxes  3. 

(d)  Take  a  trial  balance. 

(e)  Prepare: 

1.  Balance  sheet 

2.  Statement  of  profit  and  loss 

(f)  Write  the  closing  journal  entries  and  post  and  close  the  ledger. 

(g)  Take  post-closing  trial  balance. 

Additional  information:  Merchandise  inventory  $5,000.  Expense 
assets  of  $40  were  consumed  together  with  $10  of  the  furniture  and  fixtures. 
Rent  income  accrued  for  part  of  building  rented  to  J.  C.  Nobbs,  $100 
Taxes  accrued  $150. 


CHAPTER  XXIV 

BUSINESS   PAPERS— THE   GOODS   INVOICE 

Purpose  of  Chapter. — 

i.  Form  and  content  of  the  goods  invoice. 

2.  Handling  of  purchase  orders  and  invoices. 

3.  Handling  of  sales  orders  and  invoices. 

Business  Papers.— The  student  now  has  a  complete  picture 
of  the  formal  accounting  records.  All  that  is  necessary  is  a 
journal  and  a  ledger.  These  are  fundamental  and  on  them  rest 
whatever  other  records  may  be  kept.  However,  the  question 
has  no  doubt  arisen  in  the  student's  mind  as  to  how  the  book- 
keeper gets  all  the  information  necessary  for  making  the 
entries  on  his  books.  It  is  manifestly  impossible,  except  in  the 
smallest  enterprises,  for  each  employee  to  record  on  the  books 
the  transactions  which  he  has  carried  out. 

As  the  business  grows,  it  becomes  necessary  to  subdivide  the 
duties  of  the  employees.  Various  records  become  increasingly 
necessary  in  order  to  inform  those  in  charge  of  what  the  depart- 
ments and  even  the  employees  are  doing.  When  the  business  is 
small  and  the  employees  are  in  constant  touch  with  each  other,  no 
elaborate  reporting  routine  is  necessary.  As  a  business  becomes 
larger,  the  method  of  reporting  becomes  a  vital  part  of  the  organ- 
ization. These  reports,  whether  formal  or  informal,  are  called 
business  memoranda  or  business  papers.  They  serve  several 
purposes,  the  chief  of  which  is  to  provide  the  bookkeeper  with  a 
record  of  all  transactions  throughout  the  establishment.  Only 
in  this  way  can  he  make  a  complete  diary  of  the  business  and  so 
be  able  to  supply  the  owner  with  a  picture  of  his  business  for  the 
purpose  of  maintaining  adequate  control.     The  more  common 

373 


374  FUNDAMENTALS  OF  ACCOUNTING 

and  important  business  papers  will  be  discussed  in  this  and 
following  chapters. 

Necessity  for  an  Invoice.— A  goods  invoice  (Form  12),  is  a 
memorandum  record  of  a  purchase  or  sale  of  goods,  including  all 
the  detail  necessary  to  enable  the  bookkeeper  to  record  the  trans- 
action properly.  A  sale  of  goods  from  one  standpoint  is  a  pur- 
chase from  the  standpoint  of  the  other  party  to  the  transaction. 
Goods  which  prove  unsatisfactory  and  are  returned  will  be  en- 
tered on  a  memorandum,  also  spoken  of  as  an  invoice.  The 
memorandum  record  of  the  receipt  or  issue  of  goods,  whether 
formal  or  informal,  constitutes  a  goods  invoice. 

Content  of  the  Goods  Invoice. — The  following  information 
should  be  given  in  the  goods  invoice : 

1.  Date  of  transaction. 

2.  Parties  to  transaction. 

3.  Terms  of  sale  or  purchase. 

4.  Description  of  articles  bought  or  sold. 

5.  Price  or  amount  of  purchase  or  sale. 

1.  Date.  The  exact  date  of  a  transaction  is  important  as  a 
matter  of  record.  The  invoice  forms  (see  Form  13)  show  how 
provision  is  made  for  this. 

2.  Parties.  The  names  of  the  buyer  and  the  seller  must  be 
indicated.  It  is  customary  for  the  seller  to  have  his  name,  ad- 
dress, and  business  appear  prominently  at  the  head  of  the  invoice. 
This  has  a  certain  advertising  value  and  should  never  be  over- 
looked in  designing  a  sales  invoice  form.  It  is  printed  in  what- 
ever ornate  way  suits  the  merchant's  fancy.  It  is  equally  impor- 
tant that  the  name  and  address  of  the  buyer  appear.  The 
bookkeeper  must  have  the  name  of  the  party  to  whom  the  goods 
are  sold  in  order  to  make  his  bookkeeping  record.  The  address 
is  also  necessary  both  for  his  delivery  of  the  goods  and  for  the 
conduct  of  correspondence. 


BUSINESS  PAPERS— THE  GOODS  INVOICE 


375 


3.  Terms.  Goods  are  sold  on  two  bases:  (1)  cash,  and  (2) 
time.  The  term  "cash"  is  used  in  two  ways.  A  cash  sale  is 
usually  understood  to  mean  that  cash  accompanies  the  order  and 
that  the  transaction  is  settled  completely  when  the  goods  are 
purchased,  such  as  the  ordinary  cash  sale  at  a  retail  store. 
However,  often  in  the  wholesale  trade,  terms  of  sale  are  also 
spoken  of  as  "cash"  when  settlement  must  be  made  within  a 
short  time,  usually  2  to  5  days  from  the  date  of  purchase.  Some- 
times, if  payment  is  to  be  made  in  10  days,  it  is  classed  as  a  cash 
sale — terms,  cash  in  10  days,  or  cash. 


SOPH   MANUFACTURING  COMPANY,  INC. 
LEATHER    GOODS 

317    BROADWAY 

NEW   YORK, 10/3/1921     1Q 

McAndless  Bros.  &  Jarvis 


Sold  to_ 


321  S.  Canal  Street,  Chicago 


Terms 


2/10,  n/30 


Telephone  Orchard  1704 


4 
12 
24 

6 


#725  A  Wardrobe  Trunks 
@  $35.- 

#369  C  Steamers 
@  $13.50 

#135  Suit  Cases  26" 
@  $8.25 

#  79  English  Kit  Bags  24" 
@  $20.15 


140 

162 

- 

198 

- 

120 

90 

620 

90 


Form  12.  Simple  Form  of  Invoice 


376  FUNDAMENTALS  OF  ACCOUNTING 

Time  sales  are  of  two  main  kinds  also:  (i)  those  on  which  no 
discount  is  given,  and  (2)  those  on  which  a  discount  is  given. 
Goods  are  always  sold  on  time  or  credit  with  the  expectation  that 
payment  will  be  made  within  a  definite  time.  The  invoice  in- 
variably states  the  date  on  which  payment  will  be  expected. 
Thus,  goods  may  be  sold  "net  30  days,"  abbreviated  n/30,  mean- 
ing that  the  seller  expects  the  buyer  to  pay  the  net  amount  of  the 
invoice  within  30  days,  no  deduction  from  that  amount  being 
allowed.  More  frequently,  however,  a  deduction  from  the  gross 
amount  of  the  invoice  is  allowed  if  payment  is  made  earlier  than 
the  full  credit  term.  This  really  means  that  two  bases  of  settle- 
ment are  allowed  the  buyer.  Thus,  if  goods  are  sold  "net  60,  or 
2%  discount  if  paid  in  10  days" — abbreviated  as  "n/60,  2/10" — 
the  buyer  is  given  an  optional  basis  of  settlement.  He  may  with- 
hold payment  of  the  gross  amount  for  60  days  or  he  may  deduct 
2%  from  this  amount  if  he  pays  within  10  days. 

This  information  as  to  when  the  merchant  may  expect  pay- 
ment for  the  goods  is  vital  to  the  successful  conduct  of  the  busi- 
ness. He  must  maintain  at  all  times  a  sufficient  fund  of  cash  to 
meet  his  expenses  and  pay  his  bills.  If  he  knows  when  he  may 
expect  payment  from  his  customers,  he  can  tell  roughly  how  much 
cash  he  will  have  to  provide  for  in  other  ways.  It  is  therefore 
especially  important  that  the  terms  of  sale  be  indicated  on  the 
goods  invoice.  These  terms  vary  greatly  in  different  businesses. 
Sometimes  30  days  is  a  normal  or  average  time  allowed  customers 
to  pay  for  their  goods,  while  in  other  lines  of  business,  such 
as  the  farm  implement  trade,  as  much  as  a  year  may  be  given. 
Practically  all  terms  between  these  two  extremes  are  found  in 
business. 

Occasionally  one  finds  a  delivery  date  on  goods  invoices. 
Traveling  salesmen  may  go  over  their  territory  early  in  the  year 
and  sell  goods  to  be  delivered  several  months  later.  Orders 
may  be  taken  for  goods  to  be  delivered  4  or  8  months  from  date, 
or  on  any  other  date  agreed  upon.  These  goods  must  often  be 
manufactured  before  delivery  can  be  made.    An  invoice  may 


BUSINESS  PAPERS— THE  GOODS  INVOICE  377 

thus  contain  two  dates,  namely,  the  date  of  the  transaction  and 
the  date  of  the  expected  delivery.  The  terms  of  sale  may  in- 
volve still  other  dates  when  payment  of  the  invoice  will  be 
expected. 

Entering  on  an  invoice  a  later  date  from  which  the  time  for 
payment  is  counted  is  called  dating  or  extra  dating. 

The  American  Woolen  Company  invoice  (Form  13,  page  378) 
is  dated  January  26,  but  for  the  purpose  of  payment  the  time  is 
counted  from  June  1.  This  date  is  found  in  the  "  terms  "  which 
are  interpreted  as  follows :  Counting  June  1  as  the  invoice  date, 
"  7/4"  means  7%  discount  for  payment  in  4  months  from  June 
1,  and,  similarly,  the  others  mean  8%,  83^%,  or  10%  discount 
for  payment  in  60,  30,  or  10  days  respectively  from  June  1.  In 
the  terms  of  sale  of  the  Fred  L.  Sayles  Company  invoice,  the 
letters  eom  mean  "end  of  month,"  making  it  due  30  days  from 
February  28,  or  March  30. 

4.  Description  of  Articles.  It  is,  of  course,  essential  that  the 
invoice  give  a  description  of  the  articles  bought  and  sold,  covering 
the  following  points:  (1)  quantity  sold,  (2)  name  or  kind  of  article, 
and  (3)  sales  price  per  unit,  if  more  than  one  unit  is  sold. 

5.  Amount.  The  amount  of  money  involved  is  determined 
from  the  data  as  to  quantity  and  price  per  unit.  The  amount  for 
each  article  is  extended  into  a  column  provided  for  that  purpose, 
and  the  total  amount  is  also  shown.  This  work  is  called  "mak- 
ing the  extensions,"  that  is,  extending  the  amount  obtained  by 
multiplying  the  number  of  units  by  the  price  per  unit  for  each 
article,  and  then  showing  the  grand  total  of  these  amounts.  In 
Chapter  XVII  the  distinction  between  trade  and  cash  discounts 
was  explained.  Where  trade  discounts  are  allowed,  it  is  custom- 
ary to  show  on  the  goods  invoice  the  list  price  and  to  deduct  from 
it  the  trade  discounts  or  other  allowances.  The  result  will  be 
the  amount  to  be  paid. 

The  goods  invoice  should  contain  all  the  terms  of  the  sales 
contract  between  buyer  and  seller,  in  order  to  avoid  later 
dispute  or  misunderstanding. 


378 


FUNDAMENTALS  OF  ACCOUNTING 


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ui-iici»r.<s     aoB-fob  IfcnTar 


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PascoAo.RI     T»b  15  1921' 


Arthur  7arwall 

1306  Lairrenaa  St. 
Sanrar,  Colo. 


Minaret  Mills 
Hair  Cloth 

CAMBP'fe    &    opmcs    sts.  Philadelphia 
GEO.  8.  COX.  &BRO. 

PHILADELPHIA    0fC  5    '9*1 
sold  to    Oaorgo  Broad  *  Bro. 

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■unrro-u     P  ■»  1  P'C  C/0  »CA0C   fRAXSrER  CO  PltR  27  N  RiVCR 


Gratia  Vnrotri  Mills, 

WOONSOCKET.  R.  I 


9(v  r-t  Offia 

iOO  Fifth  4~ 


itm         Sold  lo 

Tcrmt  10/>0    7/4  Shipped  via 

Dolt  "opt.     }0,    1921  Oder  He. 


!0<>0-I/  <S     1 


Pes 


Atglnson  i<  CbleholD.   479  walnut.  Kansas  City,  |fo. 
P.B.B. 

6063 


c«~  w»    4897 

SMh*     A.   H.   H.. 


Dh^cvjption 


65-4 


65-4 


1.15      81.88 


memcm  moui  to .  ii  a  r 

Boro-J   mass 


American  Woolen  (p. 


Ordter  No.  9398 


tye/i/do  Hudeon  Salt  Co. 

736  Bway,  ,s.t.  c. 


American  woolen  Co  or  n  y. 
OF  NEW  TOM.  *~"  "77 tmmTLZT'  """ 

Dep't      l-l  Die    3m  .26/81       Bui  aV0  j  1344 


SHirPID  VIA 


Itoynard  1-25 


41522-1 


Form  13.     Various  Styles  of  Invoices 


BUSINESS  PAPERS— THE  GOODS  INVOICE  379 

Form  of  the  Goods  Invoice. — There  is  no  standard  form  of 
goods  invoice,  each  business  using  the  form  best  suited  to  its 
needs.  Form  13  shows  several  forms  of  invoices,  some  simple, 
others  complex,  columns  being  provided  for  the  different  types 
of  information  required. 

The  Purchase  Order. — The  purchase  of  goods  arises  through 
an  order,  oral  or  written,  which  is  the  authority  to  the  seller  to 
send  the  goods  in  accordance  with  the  specifications.  Oral  orders 
are  given  by  spoken  word  either  direct  or  over  the  telephone. 
Such  an  order  is  usually  considered  binding  in  law,  but  good 
business  practice  usually  follows  it  with  a  letter  of  confirmation 
in  which  its  terms  are  reduced  to  writing.  A  large  volume  of 
business  is  done  by  word  of  mouth,  however,  and  between  busi- 
ness houses  that  deal  with  each  other  constantly  there  is  little 
difficulty  in  adjusting  differences.  To  be  legally  binding,  how- 
ever, a  written  order  should  always  be  given,  by  telegraph,  by 
letter  or  order  blank,  or  by  signing  a  salesman's  order  form  as 
authority  for  sending  the  goods. 

Usually  no  formal  record  is  kept  by  the  buyer  of  orders  given 
by  him.  The  formal  record  is  made  when  the  goods  are  received. 
Where  a  formal  book  is  kept  for  recording  all  purchase  orders,  a 
stub  or  interleaf  is  used  for  keeping  a  memorandum  record  of  the 
orders  issued.  If  the  order  is  in  the  form  of  a  letter,  the  carbon 
copy  of  the  letter  serves  as  a  memorandum  of  the  goods  ordered. 
If  a  salesman  has  secured  the  buyer's  signature  to  an  order,  he 
leaves  a  carbon  copy  of  it  with  the  buyer.  These  purchase 
orders  are  sometimes  called  "commitments." 

Receipt  of  Purchase  Invoice. — As  soon  as  the  goods  are 
shipped,  the  seller  sends,  usually  by  mail,  an  invoice  covering 
the  shipment.  The  buyer  should  hold  this  invoice  until  the  goods 
arrive,  as  it  contains  full  information  as  to  the  goods  shipped. 
The  buyer  first  compares  it  with  his  copy  of  the  purchase  order 
as  to  terms,  articles,  and  amounts.    The  accuracy  of  the  calcula- 


380  FUNDAMENTALS  OF  ACCOUNTING 

tions  and  extensions  may  then  be  verified,  each  figure  verified 
being  indicated  on  the  invoice  by  a  check  mark.  More  often 
verification  is  deferred  until  the  invoice  is  compared  with  the 
goods  received,  when  shortages  can  be  noted  and  verification 
completed  at  one  operation. 

When  the  goods  arrive  the  railroad  company  usually  notifies 
the  buyer,  who  sends  for  them.  When  they  reach  his  place  of 
business,  he  or  his  clerks  examine  them  as  to  quality  and  quantity, 
comparing  them  with  the  purchase  order  and  the  invoice.  Any 
differences  between  the  order  and  the  goods  are  noted  on  the 
order  or  the  invoice.  After  taking  account  of  the  adjustments 
due  to  differences  between  goods  ordered  and  goods  received,  the 
buyer  determines  the  correct  amount  to  be  paid  by  him  and  places 
the  invoice  in  a  temporary  file  or  folder  to  await  its  turn  for  payment. 
The  invoices  are  often  given  a  file  number  which  may  be  the  same 
as  the  number  of  the  purchase  order  covering  the  transaction. 
Many  different  methods  of  filing  and  numbering  are  in  use. 

Record  of  Goods  Received. — The  record  of  goods  bought  is 
not  usually  made  in  the  formal  books  of  account  until  the  goods 
have  been  received  and  the  amount  .of  the  debt  determined  as 
indicated  above.  The  manner  of  recording  depends  somewhat 
upon  the  terms  of  the  purchase  and  may  be  indicated  under 
several  heads. 

i.  If  the  goods  have  been  purchased  on  account,  the  record 
will  be  made  in  the  purchase  journal  by  a  charge  to  Purchases 
account  and  a  credit  to  the  seller's  account. 

2.  If  the  purchase  was  for  cash,  the  record  in  the  purchase 
journal  will  be  the  same  as  indicated  under  (i),  but  the  cash  dis- 
bursements journal  will  also  record  the  cancellation  of  the  debt 
by  crediting  Cash  and  debiting  the  seller's  account.  These  two 
entries  are  contemporaneous,  that  is,  made  at  the  same  time.  If 
a  discount  is  allowed  for  cash  payment,  the  entry  recording  the 
charge  to  the  seller's  account  and  the  credit  to  Purchase 
Discounts  will  be  made  in  the  general  journal. 


BUSINESS  PAPERS— THE  GOODS  INVOICE 


381 


3.  If  payment  is  to  be  by  note,  the  record  of  the  goods  re- 
ceived is  made  in  the  purchase  journal  and  the  record  of  the 
payment  in  the  general  journal,  where  the  seller's  account  is 
charged  and  Notes  Payable  account  credited. 

4.  If  payment  is  made  partly  in  cash  and  partly  by  note,  the 
purchase  journal  will  record  the  receipt  of  the  goods,  the  cash 
disbursements  journal  the  cash  payment,  and  the  general  journal 
the  payment  by  note. 

5.  If  no  payment  is  made  at  the  time  of  the  receipt  of  the 
goods,  the  invoice,  after  having  been  approved  for  payment  and 


Form  14.     Receipted  Invoice 

entered  in  the  purchase  journal,  will  be  held  until  the  date  of 
payment,  when  the  payment  will  be  recorded  in  the  cash  dis- 
bursements journal.     The  invoice  will  be  marked  "Paid,"  the 


382  FUNDAMENTALS  OF  ACCOUNTING 

date  of  payment  and  often  the  number  of  the  check  by  which  pay- 
ment was  made  being  indicated,  and  then  filed  permanently, 
as  distinguished  from  the  temporary  file  in  which  it  was  held 
awaiting  payment.  If  paid  by  note  or  part  cash  and  part  note 
on  date  of  payment,  the  same  procedure  will  be  followed.  It  is 
not  customary  to  send  the  invoice  with  the  check  for  the  pur- 
pose of  obtaining  a  receipted  bill.  The  canceled  check  which 
will  be  returned  to  the  buyer  constitutes  a  sufficient  receipt.  The 
form  of  paid  invoice  has  been  shown  above  (Form  14).  Some- 
times a  separate  receipt  may  be  given  by  the  seller,  as  illustrat- 
ed in  Form  15. 


Albany,    W.V.,    ^z\ry/.0?\ 


John  B.  Stevens 


Two  hundred   sixty-seven  &  89/100 J^J,^Oru/^J 

In  full  settlement  of  account  to  date« 


a"  29/100 <^y^  /f7  (ZJ»^Jy 


Form  15.     Separata  Receipt  Form 

At  the  time  the  goods  are  taken  from  the  railroad  freight 
station,  either  the  freight  charges  must  be  paid  or  a  bill  rendered 
by  the  railroad  company  showing  the  charges  due.  When  the 
freight  is  paid,  the  entry  is  made  in  the  cash  disbursements 
journal  charging  Freight  and  Cartage  Inward  account  and 
crediting  Cash. 

Routine  of  Sales  Order. — Just  as  from  the  standpoint  of  the 
buyer  a  purchase  order  is  issued  when  goods  are  purchased,  so 
from  the  standpoint  of  the  seller  a  sale  usually  arises  as  the  result 
of  the  receipt  from  the  buyer  of  a  sales  order,  either  oral  or  writ- 
ten.    If  oral,  the  seller  usually  makes  a  written  copy  of  it  in  order 


BUSINESS  PAPERS— THE  GOODS  INVOICE  383 

to  reduce  it  to  formal  record  and  so  aid  in  riling  the  order.  Goods 
are  sold  "over  the  counter"  as  a  result  of  the  buyer's  oral  order- 
In  many  small  retail  establishments  which  sell  only  for  cash,  no 
formal  record  is  made  of  sales  other  than  the  amounts  recorded  on 
the  cash  register.  In  the  larger  retail  stores,  however,  the  sales- 
men make  written  copies  of  all  sales  orders,  which  constitute  the 
sales  invoices. 

In  wholesale  and  jobbing  establishments  sales  orders  are  al- 
most invariably  written.  They  may  be  in  the  form  of  a  letter  or 
telegram  sent  by  the  customer.  This  order  is  usually  copied  by 
order  clerks  onto  a  formal  house  order  form.  Frequently  sepa- 
rate departmental  orders  are  made  and  sent  to  the  departments 
concerned  in  filling  the  order,  the  goods  being  finally  brought  to- 
gether in  the  shipping-room  for  packing  and  forwarding  to  the 
customer. 

Some  firms  keep  their  customers  supplied  with  their  own  order 
blanks  so  that  copying  is  eliminated,  although  some  houses  even 
recopy  these  orders  to  detect  possible  errors.  The  order  is  then 
sent  to  the  various  department  stock  clerks  for  filling.  The  goods 
are  selected  and  packed  in  the  department  or  sent  to  the  shipping 
department  for  packing.  As  the  goods  of  an  order  come  into  the 
shipping  department  from  the  various  departments,  they  will  be 
assembled,  packed,  and  the  package  addressed  in  accordance 
with  instructions  given  by  the  customer  or  firm.  A  shipping 
order  will  be  issued  to  the  delivery  service,  either  the  house's 
own  service  or  independent  service,  indicating  route  and  method 
of  shipment.  The  package  as  finally  prepared  for  shipment  often 
contains  in  addition  to  the  customer's  name  and  address  a  register 
and  bale  or  case  number.  These  matters  vary  in  different  con- 
cerns and  trades  in  accordance  with  the  commodity  dealt  in. 
The  sales  order  is  then  filed,  usually  with  the  customer's  letter,  to 
serve  as  reference  in  case  of  question. 

The  Sales  Invoice. — The  sales  order  may  be  used  for  the 
preparation  of  the  sales  invoice.    Since  the  stock  clerks  check 


384  FUNDAMENTALS  OF  ACCOUNTING 

off  the  items  on  the  order  blank  as  they  fill  the  order,  when  the 
blanks  reach  the  office  full  information  as  to  the  commodities 
shipped  is  available,  and  the  billing  clerk  can  make  out  the  cus- 
tomer's invoice.  This  invoice  contains  the  same  kind  of  informa- 
tion as  the  purchase  invoice,  and  is  usually  made  in  duplicate 
or  triplicate.  The  original  goes  to  the  customer  as  notice  that 
the  goods  have  been  shipped.  The  duplicate  serves  as  &  basis 
for  the  entry  on  the  books  of  record. 

The  Retail  Sales  Order  and  Invoice. — The  sales  order  routine 
in  a  retail  establishment  differs  from  that  in  a  wholesale 
establishment.  The  sales  order,  usually  verbal,  is  reduced  to 
writing  by  the  salesman  receiving  it.  This  almost  invariably 
constitutes  also  the  sales  invoice  or  bill.  The  sales  ticket  used 
by  most  retail  establishments  is  an  informal  invoice.  The 
routine  of  handling  it  depends  on  the  internal  organization  of  the 
business. 

Two  differently  colored  invoices  are  often  used,  one  for  cash 
and  one  for  credit  sales.  The  invoices  are  made  out  in  duplicate 
or  triplicate,  the  original  going  with  the  goods  to  the  customer. 
This  one  is  often  first  sent  with  the  goods  to  the  wrapping  desk, 
where  the  quantities  or  measures  are  checked  before  the  goods 
are  wrapped,  the  package  ultimately  finding  its  way  over  the 
counter  or  by  way  of  delivery  service  to  the  customer.  The 
duplicate  of  the  cash  invoice  goes  to  the  cashier  or  cash  cage  with 
the  customer's  money  and  provides  a  basis  for  making  change 
or  checking  the  amount  of  cash  accompanying  the  invoice. 
At  the  close  of  the  day  the  sales  tickets  held  by  the  cashier  are 
used  for  proving  the  cash  received.  The  cash  received  in  the 
morning  for  making  change  plus  the  invoices  in  the  cage  at 
night  must  equal  the  amount  of  cash  in  the  cage.  In  the 
case  of  credit  sales  the  original  ticket  goes  with  the  goods 
to  the  customer,  while  the  duplicate  goes  to  the  bookkeeping 
department  to  serve  as  a  basis  for  the  charge  to  the  customer's 
account. 


BUSINESS  PAPERS— THE  GOODS  INVOICE 


385 


Methods  of  Shipping  Goods. — Goods  may  be  delivered  or 
shipped  by  parcel  post,  express,  freight — railroad  or  steamship 
— or  by  truck — an  independent  trucking  company  or  the  house's 
own  delivery  service.  When  goods  are  shipped  f.  o.  b.  shipping 
point,  it  means  that  they  are  placed  free  on  board  cars  or  ship. 
When  goods  are  shipped  f .  o.  b.  destination,  the  seller  pays  the 
freight.  However,  prepaid  freight  may  be  at  the  customer's 
expense,  in  which  event,  although  paid  by  the  seller,  it  is  charged 
against  the  customer  and  collected  from  him.  Goods  are  fre- 
quently sent  C.O.D.,  that  is,  cash  on  delivery.  The  purchaser 
cannot  get  the  goods  until  he  pays  for  them. 

Bill  of  Lading. — When  the  goods  are  delivered  to  the  carrier, 
a  receipt  is  made  out.  In  the  case  of  express  shipments  this  is 
called  an  express  receipt  (Form  16).     In  the  case  of  freight 


AmEBICAN   liAlLWAY  ExPttESii  Co. 

Uniform  Express  Receipt       COLLECT   3L        508TOO 

NON-NEGOTIABLE 

Issued  at  New  York,  N.  Y., 192 

Received  from _ 

Address 

Subject  I.  |E  ClmnMn riWW  mnd  TurilTt  in  £rf.cf  on  />«(.  o/  /»«• 

Article 


Weight. 


Consigned  to. 
At 


Value  herein  declared 
by  Shipper  to  be 


Wkfch  th*  Company  •£»••  to  Wl 


and  •i«n»  th  la  r»c«.nt. 


.Dollars. 

rkral, 


NOTE 

The  Company  will  not  pay 
over  $50,  in  case  of  loss,  or 
50  cents  per  pound,  actual 
weight,  for  any  shipment  in 
excess  of  100  pounds,  unless 
a  greater  value  is  declared 
and  charges  for  Mich  greater 
value  paid. 


The  Company'!  charge,  ex- 
cept upon  ordinary  live 
stock,  is  dependent  upon 
the  value  of  the  property, 
as  declared  or  released  by 
the  shipper.  If  the  shipper 
desires  to  release  the  value 
to  $50  for  any  shipment  of 
100  pounds  or  less,  or  not 
exceeding  fifty  cents  per 
pound,  actual  weight,  for 
any  shipment  in  excess  of 
100  pounds,  the  value  may 
be  released  by  inserting 
"not  exceeding  $50,"  or 
"not  exceeding  fifty  'cents 
per  pound,"  in  which  case 
the  Company's  liability  is 
limited  to  an  amount  not 
exceeding  the  value  so 
declared  or  released. 


Form  16.     Express  Receipt 

shipments,  it  is  called  a  bill  of  lading.     There  are  two  kinds 
of  bills  of  lading,  the  straight  and  the  order.     The  straight  bill 


386  FUNDAMENTALS  OF  ACCOUNTING 

will  be  explained  here,  the  order  bill  on  page  467.  In  addition  to 
being  a  receipt,  the  bill  of  lading  is  a  contract  between  the  shipper 
and  the  carrier  for  the  transportation  of  goods,  and  as  such  con- 
tains the  conditions  under  which  the  goods  are  accepted  for  ship- 
ment. The  bill  of  lading,  by  act  of  Congress  in  1908,  was  made 
uniform  in  content  and  size.  It  is  made  out,  either  by  the  carrier 
or  the  shipper,  in  sets  of  three  (see  Form  17),  the  first  the  original, 
the  second  the  shipping  order,  and  the  third,  the  memorandum. 
The  shipping  order  is  signed  only  by  the  shipper  and  is  retained 
by  the  cr  -  r.  It  gives  the  carrier  authority  for  shipping  the 
goods  and  binds  the  shipper  to  the  terms  of  the  contract  signed 
by  him.  The  memorandum  and  the  orignal  are  signed  by  both 
shipper  and  carrier.  The  memorandum  is  merely  an  "acknowl- 
edgment that  a  bill  of  lading  has  been  issued,  etc."  and  is  for  the 
shipper's  file.  The  original  is  the  full  contract  entered  into  and 
should  be  sent  to  the  customer  or  consignee.  Careful  note 
should  be  made  of  the  content  and  the  way  in  which  the  bill  of 
lading  is  drawn  up.  Most  shipments  are  made  on  the  straight 
bill  of  lading,  which  is  not  negotiable. 

Bookkeeping  Record  of  the  Sales  Invoice. — The  sales  invoice 
is  the  basis  for  the  entry  in  the  sales  journal,  from  which  it  may 
be  posted  as  a  charge  to  the  customer's  account.  Where 
the  modern  sales  journal  is  used,  only  a  single  line  is  given 
to  each  item.  The  customer's  account  may  be  posted  from  the 
sales  journal  or,  more  frequently,  from  the  duplicate  sales  invoice, 
after  which  the  invoice  goes  into  the  permanent  file.  A  sale  al- 
ways involves  a  debit  to  the  customer  and  a  credit  to  Sales.  The 
record  of  the  payment  depends  on  the  terms.  Sales  may  be 
for  cash  or  credit.  A  customer  may  give  his  note  or  there  may 
be  part  cash  payment,  part  note,  with  balance  on  account.  If 
cash  is  received,  it  must  be  recorded  in  the  cash  receipts  journal. 
If  a  note  is  received,  it  must  be  recorded  in  the  general  journal, 
the  procedure  being  similar  to  that  followed  in  the  case  of  the 
purchase  invoice.    When  the  customer  pays  his  account,  where 


BUSINESS  PAPERS— THE  GOODS  INVOICE 


387 


THE  BALTIMORE  &  OHIO  RAILROAD  CO. 


THIS    MEMORANDUM  k.^-u^iu.MrfUaU.k-1 


SUppVl  Ho.  , 
AjhiTjIIo. 


I  REf  I'^Vi-  *°b*<t  w  "*  ^'■"fiw'w  oao  toriBe  in efleol  M  U»  lut  of  the  receipt  c.y  the  corner  or  tu  property  d 
nnnrimhnr   IB 


OrifuuJ  E.lPof  1'  f^'i. 


fn»  — ImtaM  Hard.ra.ra  Co. 


» !qc 


fcapyiMlfewcl  orcer.  except 
u  UMicited  beiow.  ertrkk  Mid  j 


FOR  UK  in  CONXICTIOK  WITH  UDirORM  (ILL  Of  L.OIB4 

THE  BALTIMORE  &  OHIO  RAILROAD  CO. 


THIS  SHIPPING  ORDER-^wuci^fiiwuk»)*k,i-i«u.aj.F»c3«i.c«*N»% 


RECEIVE,  aebjeci  t, 

«/ — PUtirnirgh, 


'tooth*  data  of  Imim  of  tfcia  Sfcippinf  Order, 


■»■■      EfiyatODB  J3tX&UXm\JiSLm r the  property  described  below,  la  apparent  food  ardor,  natt  u  r>ot*d 

WWW  mi  coodtuati  of  cotitMM  of  paie-ayea  naknowalT  Mriwd.  twitif*ii  aawj  Jutinif  —  hHfcejod  blow,  whkfa  oatf  Coipp—y 


..FORM    BILL  OP   LADING 


THE  BALTIMORE  &  OHIO  RAILROAD  CO. 


STRAIGHT  BILL  OF  LADING-ORIGINAL-NOT  NEGOTIABLE. 


RECEIVED,  aubjeet  to  the  cUaaifiu 


«/ — Plttahiirgh,   Pn . 


3  OririnaJ  Bill  of  Leading 
-Dacembar   16 


fro" Kft* 


■^ytftr,^    TTar<<»ar*    f^n  . 


t  rood  order,  except  u  no  -rj 
!  below,  which  uid  Compc  .7 


ita  and   eoodiUon  of  content*  of  paekace*    u»know»J,    marked,    confirmed  and  Ms  luted  aa  indicated   below,   i 

in*  of  aaid  property,  that  erer*  aerriee  to  be  performed  her* 
cor.tained  tiaciudiof  toadiUxia  oa  back  hereof,  and  which 


aub)ect  to  all  lb*  eonditi jna.  whether  printed  or  written,   bt 
kf  am  ahipper  aad  accepted  for  himaelf  sad  kia  auic&a. 

Tke  Rate  «/ Frtigkt  fi*m     Pittsburgh 


IP        (Thlnncm 

e,  ■'*  Cmtr  *rr 

ICO  Lit. 

JS5ET 

TtrireX 

fe,  .."_  La- 

wS-.jii.ir.  [».'.'. 

«,'&.!  «oc 

_l«5-e 

,-.-. 

o£. 

cj:J„=.|a2, 

p. 

I           I 

I 

!    i 

Consittxxl  to .T-    Frl.mrM    Bill  .ft    f.   Cry . 


Destitution rri'n.frn 


Stol.nl    TTHnnl.  (Vinnt.  erf      CnnV 

_Cit  Ioili»l Cr  No. 


KKooPToM  OF  * 


Casta  HarAi.ar. 


fcer.  "To  bt  Prepaid." 


the   charge,  ob  the  | 
petty  detcribad  benjon. 


Charge.  Adruccdt 


CTaia  Bin  0*  Mhi  fe  to  to  tepeW  by  the  aeipper  «ei  .cast  of  the  courier  iMejkwf  eeaae.) 


Form  17.    Straight  Bill  of  Lading 


388 


FUNDAMENTALS  OF  ACCOUNTING 


the  sale  has  been  for  credit,  if  a  sales  discount  is  taken,  the  dis- 
count will  be  recorded  either  in  the  general  journal  or  cash  book- 
Credit  Memorandum. — The  credit  memorandum  (Form  18) 
is  a  goods  invoice  indicating  a  credit  allowed  a  customer  because 


CREDIT  MEMORANDUM  from 
THE   BROUN-GREEN   COMPANY 

48  John  St..  New  York, 

name       Henry  Davidson 

address      411  Main  Street,   Buffalo,   H     Y 
WE  CREDIT  SgSSfiSSSE'or      Jan.  4.  1921 


APPROVED 

F,  L.  B, 


ran  18  To  correct  overcharge  in  pricing  20  II  envelopes 
"  1  Binder  #  37  A.  returned 


10.50 
.75 


Form  18.     Credit  Memorandum 

of  an  adjustment  made  after  the  sale  and  the  sending  of  the 
original  invoice.     These  adjustments  or  allowances  arise  from  : 

1.  Goods  returned  by  the  customer. 

2.  Damaged  goods  or  goods  not  up  to  standard  in  quality. 

3.  Shortages,  that  is,  less  goods  received  by  the  customer 

than  was  charged  on  his  bill. 

4.  Clerical  errors  in  price  or  in  the  extensions  of  the  invoice. 
The  credit  memorandum  is  similar  to  the  sales  invoice  in  that 

it  must  give  practically  the  same  information  as  to  buyer  and 
seller,  and  the  amount  and  nature  of  the  allowance.  To  dis- 
tinguish the  credit  memo  from  the  regular  sales  invoice,  a  differ- 
ent color  of  paper  is  often  used,  preferably  red  or  pink. 

On  the  books  the  credit  memo  has  exactly  the  opposite  effect 
to  the  sales  invoice.  On  the  customer's  books  the  transaction 
is  a  charge  against  the  seller  and  a  credit  to  Purchases  or  Purchase 
Returns  and  Allowances,  where  such  an  account  is  kept.  On 
the  seller's  books  the  transaction  is  a  debit  to  Sales  or  to  Sales 


BUSINESS  PAPERS— THE  GOODS  INVOICE 


389 


Returns  and  Allowances,  where  such  an  account  is  kept,  and  a 
credit  to  the  customer's  account  offsetting  the  original  charge 
made  at  the  time  of  the  sale. 


The  Monthly  Statement  of  Account. — Where  goods  are  sold 
on  credit  and  accounts  opened  with  customers,  it  is  the  practice 
to  send  the  customer  a  statement  of  his  account  at  least  monthly. 


STATEMENT 

L.  H.  BIGLOW  &  COMPANY, 

PRINTING  -  STATIONERS 
24  Beaver  Street 

Inc., 

FOLIO 

175                                                              New  York. 

B.   C.  Coombs  &  Co..  Inc.. 
27  Jackson  PI., 

Newark, 

N.   J. 

Accounts  are  due  upon  presentation  of  bill 

9/30 

Balance 

25 

40 

10/3 

8 

27 

TO  MERCHANDISE  AS  PER  BILLS  RENDERED 
'1               ft                       If      If          1)                   if 
If                It                         If       ft           •!                    17 

10 
79 

106 

06 
ttO 
76 

196 

60 

222 

— 

Credits 

10/2 

10/12 

10/15 

10/31 

Cash 

Allowance,    inv.    10/8 

cash 

Balance  due 

26 
4 

65 

40 

20 
GS 

115 

25 

106 

75 

Form  19.     Statement  of  Account 


390  FUNDAMENTALS  OF  ACCOUNTING 

This  affords  him  an  opportunity  to  compare  the  statement  with 
his  records  and  permits  corrections  to  be  readily  made.  It  also 
serves  as  a  request  for  the  amounts  due  or  past  due.  The  state- 
ment is  not  a  sales  invoice  but  a  summary  or  detailed  statement 
of  dealings  with  the  customer  during  the  past  month.  In  some 
concerns  the  details  of  all  purchases  made,  of  all  goods  returned, 
and  of  all  cash  or  notes  paid  by  the  customer,  are  set  forth  in  this 
statement.  More  often,  however,  only  a  summary  of  the  trans- 
actions is  shown.  In  this  case  the  statement  is  practically  a 
transcript  of  the  customer's  ledger  account,  showing  the  balance 
due  at  the  beginning  of  the  month,  the  debits  and  credits  entered 
during  the  month,  and  the  balance  due  at  the  end  of  the  month. 
Form  19  indicates  the  nature  of  the  monthly  statement. 

The  customer's  ledger  account  as  kept  by  the  seller  should  indi- 
cate in  the  explanation  column  the  dates  on  which  monthly  state- 
ments are  sent  to  customer.  This  is  a  part  of  the  history  of  the  con- 
cern's dealings  with  its  customers  and  should  be  a  matter  of  record. 

Questions 

1.  What  are  the  basic  records  in  any  bookkeeping  system? 

2.  How  does  the  bookkeeper  get  the  necessary  information  for  making 
his  record? 

3.  What  is  a  goods  invoice?     Does  the  term  include  both  sales  and 
purchases  and  returned  goods  also? 

4.  What  five  kinds  of  information  should  the  goods  invoice  contain? 
Explain  the  importance  of  each. 

5.  What  do  you  understand  by  a  cash  sale?     A  credit  sale? 

6.  How  are  terms  of  sale  usually  stated?     Give  an  example. 

7.  How  is  the  gross  amount  of  the  invoice  found? 

8.  How  is  the  net  amount  of  the  invoice  found? 

9.  Distinguish  between  the  purchase  order  and  the  purchase  invoice. 
What  is  the  purpose  of  the  purchase  order? 

10.  What  are  commitments? 

11.  Explain  fully  the  use  made  of  the  purchase  invoice  by  the  buyer: 

(a)  When  first  received  through  the  mails. 

(b)  When  the  goods  arrive. 

(c)  When  payment  is  made. 


BUSINESS  PAPERS— THE  GOODS  INVOICE  391 

12.  Explain  fully  the  record  made  of  goods  received  when  purchased: 

(a)  On  account. 

(b)  For  cash. 

(c)  By  note. 

(d)  Part  payment  by  cash  or  note. 

13.  When  is  an  invoice  filed  temporarily?    When  permanently? 

14.  How  is  a  receipt  obtained  for  payment  of  an  invoice? 

15.  What  entry  is  made  for  the  payment  of  freight? 

16.  Explain  the  use  made  of  a  sales  order  in  a  retail  store. 

17.  Explain  the  use  made  of  a  sales  order  in  a  wholesale  store. 

18.  Trace  a  sale  from  the  time  the  order  is  received  to  the  time  of 
shipment  or  delivery. 

19.  How  is  the  sales  invoice  made  up?     What  does  it  contain?     What 
use  is  made  of  it? 

20.  Explain  fully  the  routine  of  the  sales  order  or  invoice  in  a  retail 
store.     Show  its  uses  both  for  cash  and  credit  sales. 

21.  In  what  different  ways  are  goods  shipped? 

22.  What  is  an  express  receipt?    A  bill  of  lading? 

23.  What  information  does  the  bill  of  lading  contain? 

24.  Give  the  names  and  uses  of  the  three  copies  made  of  the  bill  of 
lading. 

25.  What  signatures  are  attached  to  the  different  copies? 

26.  Explain  the  bookkeeping  records  made  from  the  sales  invoice  under 
the  various  terms  of  sale. 

27.  What  is  a  credit  memorandum?    Out  of  what  kinds  of  transactions 
does  it  arise? 

28.  What  bookkeeping  record  is  made  of  a  sales  credit  memo?    A  pur- 
chase credit  memo? 

29.  What  is  the  purpose  of  the  monthly  statement  of  account?    What 
information  does  it  contain? 

30.  Is  any  bookkeeping  record  made  of  the  monthly  statement  of 
account,  either  when  issued  or  when  received? 

Problems1 

1.  On  June  25  another  shipment  of  hardware  is  made  to  the  Hard- 
ware Specialties  Company,  amounting  to  $254.25.     The  balance  owed  to 


1  Note  to  Instructors :  Start  the  student  at  once  on  Problem  14,  a  series  of  transactions — 
running  through  four  chapters — to  be  recorded  in  the  bound  blank  books  provided.  This 
and  the  subsequent  similar  problems  of  later  chapters  are  chiefly  for  review  and  should  in 
the  main  be  worked  up  by  the  student  independently.  The  other  problems  are  to  accompany 
the  text  of  the  chapter  and  should  be  assigned  as  the  text  matter  is  developed. 


39: 


FUNDAMENTALS  OF  ACCOUNTING 


Sargent  and  Company  by  the  Hardware  Specialties  Company  on  June  r 
amounted  to  $425 .50.  This  was  paid  on  June  6,  less  2%.  The  Hardware 
Specialties  Company  pays  the  June  account  on  July  5.  less  2%  and  requests 
that  the  receipted  statement  be  returned. 

(a)  Prepare  the  monthly  statement  to  be  sent  to  the  Hardware  Special- 
ties Company  on  July  1. 

(b)  Receipt  the  statement. 

2.  On  March  3,  19 — ,  George  T.  Brodnax,  Inc.,  of  Memphis,  Tenn., 
receives  the  following  order  from  George  Anderson  of  Detroit,  Mich.,  to  be 
sent  C.  O.  D.,  American  Railway  Express: 

1  Electrolier  #22146  at  $  20- 

1  Sterling  Silver  Dinner  Set  #27982  at  500- 

1  Set  Sterling  Silver  Tableware  Livingston  design  #27880  at  499- 

Prepare  the  invoice. 

3.  On  August  3,  19 — ,  The  Florsheim  Shoe  Company  of  Chicago 
shipped  the  following  by  express  to  the  Addison  Shoe  Store  of  Pough- 
keepsie,  N.  Y.: 


Factory  No. 

Case  No. 

Pair 

6i739 

1 

24 

61710 

3 

24 

61712 

2 

24 

Width 

Last 

Price 

D 

Saranac    at 

Si  i  - 

D 

Rainbow 

1 1  - 

D 

Ormond 

11. 55 

All  Rajah  C.  F.  Bal.  80 


Terms:  October  1,  19 — ,  2/10,  n/60. 
Prepare  the  invoice. 

4.  The  Vindex  Company  of  Pratt  St.  and  Market  PL,  Baltimore,  Md., 
ships  the  following  by  express  on  April  22,  19 — ,  to  Madame  A.  Ferrar, 
proprietor  of  the  Ladies  Waist  and  Corset  Shop,  of  Asbury  Park,  N.  J. : 


Lot 

Doz. 

Boxes 

HDV 

2}4 

5 

Underwear  at  $  8.50  per  doz, 

H6096V9 

3/12 

1 

V.  Shirts      "     30.00    "       " 

H6379V9 

3/12 

1 

"       "           "    33-5o    "       " 

Terms:  2/10,  n/60. 
Prepare  the  invoice. 

5.  The  following  purchase  order  is  received  on  June  4  by  Sargent  and 
Company  where  the  order  is  transferred  to  their  regular  order  slips,  a  copy 
of  which  is  sent  to  the  shipping  department.  The  latter  informs  the  billing 
department  that  the  120  sets  of  locks  and  the  butts  are  to  be  sent  from 
factory  located  at  New  Haven,  Conn.,  while  the  remainder  of  the  order  is 


BUSINESS  PAPERS— THE  GOODS  INVOICE 


393 


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394  FUNDAMENTALS  OF  ACCOUNTING 

being  shipped  from  stock.  Shipment  is  made  on  June  10,  consisting  of 
two  cases  of  rim  locks  weighing  is6#  and  two  cases  of  miscellaneous 
hardware,  weighing  407#. 

Prepare  the  invoice  to  be  sent  to  the  Hardware  Specialties  Company 
for  the  goods  that  are  being  sent  from  stock  and  show  how  the  bill  of  lading 
would  be  prepared. 

6.  On  June  17  the  New  York  office  of  Sargent  and  Company  is  in- 
formed that  the  remainder  of  the  order  has  been  shipped  from  New 
Haven  by  the  Pennsylvania  Railroad  Company.  The  shipment  con- 
sists of  two  cases  of  locks  weighing  24o#  and  two  cases  of  butts  weighing 
360$.     Prepare  the  invoice  and  bill  of  lading. 

7.  On  June  20  the  Hardware  Specialties  Company  returns  the  follow- 
ing guaranteed  products  which  are  accepted  by  Sargent  and  Company. 

x/2  Doz.  Hammers  #11    at  $12.46  per  doz. 
X  "       Hatchets  #232   at    15.32      "     " 

Prepare  the  credit  invoice. 

8.  The  following  articles  were  returned  to  Samstag  and  Hilder  Broth- 
ers, importers  and  manufacturers,  Broadway  and  29  St.,  New  York  City, 
by  H.  Witherspoon,  proprietor  of  the  Cute  Notion  Shop,  Saratoga  Springs, 
N.Y.: 

Lot  No. 

4/6440        ]/2  Doz.  Necklaces  at  $4  -  per  doz. 

3565         %   "         "        "   8  -    "   « 
2510         X   "         "        "  8.5o   «   " ) 

2515  %     "  "  "    8.50     "     "  \    Iess5/o 

(a)  Prepare  the  credit  invoice. 

(b)  Give  the  entry  for  Samstag  &  Hilder  Brothers. 

(c)  Give  Witherspoon's  entry. 

9.  On  June  15, 19 — ,  the  American  Chair  Manufacturing  Company  of 
Halstead,  Pa.,  makers  of  living-room,  library,  hall,  den,  chamber,  desk 
and  reception  chairs,  ships  the  following  to  the  Globe  Furniture  Company 
of  Troy,  N.  Y.,  by  the  American  Railway  Express: 

2 — 131  x/t  S.  W.  Chairs  at  $  8.40  per  chair 
2— 61  KB.  E.  "  "  7.65  "  " 
2— 130  K  A.  W.  "  "  7.40  "  " 
1— 120  "  "  "  "  10.40  u  " 
1— 120K  "  "  "  "  9.65  u  " 
1— 120  yi  "  *        "     "        9.65    "       M 


BUSINESS  PAPERS— THE  GOODS  INVOICE  395 

Terms:  2/30,  n/60.  F.  O.  B.  Factory.  Weight  of  shipment,  114  lb. 
Express  collect. 

(a)  Prepare  the  invoice. 

(b)  Prepare  the  express  receipt. 

10.  James  Arnold  of  St.  Louis,  Mo.,  proprietor  of  a  retail  dry-goods 
store,  has  made  the  following  purchases  during  the  month  of  May,  19—, 
from  Butler  Brothers,  Kansas  City,  Mo.,  wholesalers  of  general  mer- 
chandise : 

May    Amount 

5  $146.25 

15  75-66 

2°  56.75 

25  87.73 

On  May  18  he  returned  merchandise  to  the  value  of  $25.43  and  on  May 
25  was  allowed  $7.63  due  to  overcharges  on  certain  items  of  May  15 
shipment. 

Terms  of  sale:  2/10,  1/30,  n/60. 

Prepare  the  monthly  statement  to  be  sent  to  James  Arnold  on  June  1. 

11.  On  June  7  James  Arnold  pays  his  May  account,  less  a  cash  dis- 
count of  1%. 

(a)  Show  the  receipted  statement. 

(b)  Give  Arnold's  entry  at  date  of  payment. 

(c)  Give  Butler  Brothers'  entry  when  they  receive  check. 

12.  On  July  1,  19 — ,  R.  C.  Adams  sends  a  check  for  $250  to  the  Curtis 
Realty  Company  of  New  York  City,  to  cover  his  rent  bill  for  July. 

Prepare  the  rent  receipt. 

13.  On  June  10, 19 — ,  R.  B.  Kings  sends  a  check  for  $3 50  to  the  Spencer 
V.  Bartlett  Company,  of  Chicago,  as  a  payment,  on  account  for  mer- 
chandise received  on  June  9. 

Prepare  the  receipt. 

14.  A  series  of  transactions  is  to  be  recorded  in  blank  books  provided. 
You  have  been  engaged  as  bookkeeper  by  Mr.  Thatcher  in  place  of  Mr. 

Bright,  the  former  bookkeeper,  who  has  been  promoted  to  manager.  Mr. 
Bright  finds  that  his  whole  time  must  be  given  to  his  new  duties  therefore 
you  will  be  required  to  close  the  books  without  his  assistance.  Mr. 
Thatcher  closes  his  books  at  the  end  of  every  3  months  (quarterly)  and 
requires  a  trial  balance  at  the  end  of  each  month.     Below  are  given  a  trial 


396 


FUNDAMENTALS  OF  ACCOUNTING 


balance  and  additional  information  from  which  the  books  are  to  be  closed 
Proceed  with  the  quarterly  closing  as  follows: 

(a)  Use  the  bound  blank  books  provided  in  the  stationery — the 
journals  and  the  ledger.  Set  up  the  ledger  by  entering  in  the  ledger 
blank  on  the  pages  named  in  the  folio  column  the  accounts  shown  in  the 
accompanying  trial  balance.  Allow  equal  space  for  each  account  where 
there  is  more  than  one  account  on  a  page.  On  the  pages  provided  make 
an  index  of  the  ledger,  entering  account  titles  and  page  numbers  under  the 
proper  index  letters. 


Trial  Balanxe,  December  31.  19 — 


Cash 

Trade  Acceptances  Receivable 

Notes  Receivable 

Amos  K.  McBride 

Craig  and  Drury 

Homer  Welbrun 

Roy  A.  Parks 

Sundry  Customers 

Merchandise  Inventory 

Accrued  Assets 

Liberty  Bonds 

Furniture  and  Fixtures 

Delivery  Equipment 

Buildings 

Lot  #438 

Trade  Acceptances  Payable 

Notes  Payable 

Chester  Pierce 

Herbert  Murray 

H.  M.  Scott  and  Company 

Sundry  Creditors 

Accrued  Liabilities 

Mortgage  Payable 

Harold  Thatcher,  Capital 

Harold  Thatcher,  Drawing 

Merchandise  Purchases 

Freight  Inward 

Returned  Purchases  and  Allowances 
Merchandise  Sales 


$  2,348 

15 

1,200 

- 

58 

20 

285 

50 

176 

25 

148 

40 

8,900 

- 

2,300 

- 

1,500 

- 

2,000 

- 

15,000 

- 

5,000 

S  1,500 

1,140 

318 

1,217 

8,000 
28,000 

160 

- 

45,894 

75 

392 

20 

716 
46,718 

60 

20 


BUSINESS  PAPERS— THE  GOODS  INVOICE 


397 


Returned  Sales  and  Allowances 

Freight  Outward 

Salesmen's  Salaries 

Advertising 

General  Expense 

Office  Supplies 

Repairs  to  Building 

Office  Salaries 

Telephone  and  Telegrams 

Insurance 

Taxes 

Bad  Debts 

Interest  Cost 

Sales  Discount 

Interest  Income 

Rent  Income 

Purchase  Discount 


593 

45 

27 

5° 

250 

- 

70 

- 

165 

go 

84 

40 

165 

- 

400 

- 

25 

50 

28 

- 

3i8 

75 

285 

20 

74 

15 

127 

75 

112 

10 

$87,851 

30 

$87,851 

3° 

At  the  top  of  page  10  open  the  Profit  and  Loss  account  and  on  page  1 1 
the  Merchandise  Trading  account. 

(b)  Prepare  a  test  or  check  trial  balance  of  your  ledger  by  taking  off 
all  the  debits  and  then  taking  off  all  the  credits.  The  totals  must  be  the 
same  as  the  trial  balance  in  the  text.  If  you  have  no  adding  machine,  rule 
two  money  columns  on  a  sheet  of  paper  and  list  all  debits  (amounts  only) 
in  your  ledger  in  the  left  column  and  then  list  all  credits  (amounts  only)  in 
the  right  column.  Total  the  columns.  After  this  compare  each  amount  in 
your  check  trial  balance  with  each  amount  in  the  text.  They  should  be  in 
exactly  the  same  order. 

Additional  information,  December  31,  iq — : 

Merchandise  inventory $14,690  - 

Advertising  to  be  charged  to  next  period 30  - 

General  expense  not  consumed 45  - 

Office  supplies  not  consumed 25  - 

Insurance  prepaid 10  - 

Salaries  accrued  (office) 50  - 

Accrued  interest  on  notes  receivable 15  - 

Accrued  interest  on  mortgage  payable  120  - 

Accrued  interest  on  Liberty  bonds 18.50 


398  FUNDAMENTALS  OF  ACCOUNTING 

The  following  assets  decreased  in  value  through  use: 

Furniture  and  fixtures,  i%  per  month. 
Delivery  equipment,  i  ¥2%  each  month. 
Buildings,  ]/2  %  per  month. 
Note  that  this  is  a  3-months'  period. 

(c)  Prepare  a  balance  sheet. 

(d)  Prepare  a  profit  and  loss  statement. 

(e)  Write  the  adjusting  and  closing  journal  entries  on  page  1  of  the 
general  journal. 

(f)  Prepare  a  post-closing  trial  balance.  On  pages  32  and  34  of  the 
journal  blank  provision  is  made  for  recording  all  trial  balances.  Write 
the  names  of  all  accounts  in  the  order  in  which  they  appear  in  the  ledger, 
omitting,  however,  the  Profit  and  Loss  and  Merchandise  Trading  accounts 
as  these  never  have  any  balance.  Be  sure  to  leave  vacant  one  line  at  the 
bottom  of  page  32  and  one  at  the  top  of  page  34  for  page  totals  and  totals 
brought  forward  respectively.  Record  the  post-closing  trial  balance  in 
the  first  two  money  columns,  heading  the  columns  "Post-Closing, Dec. 31, 
19 — ."  Some  accounts  show  no  balances  in  this  trial  balance.  These 
accounts  will  be  used  later,  therefore  they  should  appear  in  proper  order 
in  all  the  trial  balances  recorded  on  pages  32  and  34  of  the  journal. 

(This  problem  is  continued  as  Problem  14,  Chapter  XXV.) 


CHAPTER  XXV 
NEGOTIABLE    INSTRUMENTS— PROMISSORY   NOTES 

Purpose  of  Chapter.— 

i .  Contents  and  form  of  a  promissory  note. 

2.  Indorsements  and  holders  in  due  course. 

3.  Settlement  of  a  promissory  note. 

Negotiable  Instruments. — During  the  unsettled  period  in 
Europe  about  the  twelfth  and  thirteenth  centuries,  the  practice 
of  using  a  coin-dealer's  receipt  for  moneys  on  deposit  with  him 
rather  than  the  moneys  themselves  came  into  general  use.  The 
various  coins  had  no  standard  value,  even  coins  of  the  same  face 
value  differed  materially  in  the  value  of  their  precious  metal  con- 
tent. This  was  due  to  the  fact  that  many  rulers,  needing  more 
money,  put  less  precious  metal  in  each  coin  and  so  made  more 
"pieces"  of  money.  As  a  result  all  metal  money  was  thrown 
under  suspicion,  the  real  value  not  being  determinable  except 
by  chemical  analysis.  The  money-dealers  of  Europe  made  this 
analysis  and  issued  receipts  to  the  owners  for  the  money  turned 
over.  This  paper  receipt,  since  it  represented  the  tested  value 
of  the  money,  was  more  acceptable  to  merchants  than  money  it- 
self, which  required  analysis  to  determine  its  exact  value  every 
time  it  was  exchanged  in  the  purchase  of  commodities  and  the 
settlement  of  debts. 

There  was  also  much  less  danger  attached  to  the  use  of  these 
paper  receipts  than  to  the  interchange  of  bulky  metallic  money. 
Organized  bands  of  robbers  often  made  the  movement  of  metallic 
money  extremely  perilous,  and  so  written  orders  for  money, 
known  as  "drafts,"  came  into  general  use. 

Thus,  temporary  local  conditions  gave  rise  to  the  draft  and 
promissory  note,  two  very  useful  devices  of  modern  business 

399 


400  FUNDAMENTALS  OF  ACCOUNTING 

At  present  some  form  of  negotiable  instrument  is  used  in  the 
transaction  of  perhaps  90%  of  the  business  of  the  country. 
Formerly  each  state  had  its  own  negotiable  instruments  law  which 
differed  in  some  particulars  from  the  laws  of  the  other  states. 
So  much  of  the  country's  business  being  interstate  business,  to 
attempt  to  transact  it  by  means  of  instruments  drawn  in  one 
state  and  subject  to  the  laws  of  another  state  which  might  be 
quite  different,  was  extremely  confusing.  To  avoid  this  confu- 
sion a  standard  Negotiable  Instruments  Law  has  been  adopted 
by  all  the  states  of  the  Union,  except  Georgia.  Such  a  uniform 
law  has  manifest  advantages. 

What  the  Negotiable  Instrument  Is. — The  negotiable  in- 
strument is  a  formal  instrument,  almost  invariably  of  paper, 
which  takes  the  place  of  money  or  changes  the  form  of  the  debt 
into  one  more  easily  converted  into  money.  Two  illustrations 
will  be  given.  Thus,  if  a  man  has  funds  deposited  in  a  bank,  he 
may  write  an  order  on  the  bank  in  the  form  of  a  check  to  pay 
out  some  portion,  or  all,  of  those  funds  to  an  indicated  party. 
This  order  is  usually  accepted  as  money. 

The  formal  written  promise  to  pay  a  sum  of  money  at  a  given 
time  in  the  form  of  a  note  often  serves  as  an  intermediate  step 
in  the  settlement  of  a  debt.  Debts  are  usually  settled  by  pay- 
ment of  money,  but  at  times  a  formal  written  promise  to  pay 
money,  as  distinguished  from  the  open  account  claim,  postpones 
the  money  payment  to  a  later  date.  Since  this  formal  promise 
can  be  held  until  maturity,  when  its  value  in  money  will  be  re- 
ceived, or  can  be  transferred  to  a  creditor  to  settle  a  debt  and  so 
serve  in  place  of  money,  or  can  usually  be  sold  at  any  time  to  a 
banker,  the  owner  of  the  promise  can  thus  convert  it  into  money. 
The  open  account  claim  cannot  easily  be  converted  into  money 
or  transferred  before  its  due  date.  Accordingly,  the  purpose  of 
the  negotiable  instrument  as  an  intermediate  step  in  the  settle- 
ment of  debts  and  its  value  in  the  transaction  of  business  are 
apparent. 


PROMISSORY  NOTES  40 1 

Since  the  negotiable  instrument  is  so  important  in  business, 
certain  requirements  as  to  form  and  restrictions  as  to  content 
are  laid  down  in  the  Negotiable  Instruments  Law.  In  order  to 
be  negotiable,  an  instrument  must  conform  to  the  following 
requirements : 

1.  It  must  be  in  writing  and  signed  by  the  maker  or  drawer. 

2.  It  must  contain  an  unconditional  order  or  promise  to  pay 

a  certain  sum  in  money. 

3.  It  must  be  payable  on  demand  or  at  a  fixed  or  determin 

able  future  time. 

4.  It  must  be  payable  to  order  or  to  bearer. 

5.  Where  the  instrument  is  addressed  to  a  drawee,  he  must 

be  named  or  otherwise  indicated  therein  with  reason- 
able certainty. 

As  compared  with  the  first  four  this  fifth  requirement  is  of 
minor  importance.  The  meaning  and  effect  of  these  require- 
ments will  be  explained. 

The  most  common  types  of  negotiable  instruments  are: 

t.  Promissory  notes 

2.  Checks 

3.  Drafts 

4.  Trade  acceptances,  etc. 

Post-office  and  express  money-orders,  travelers'  checks,  etc., 
also  are  negotiable  instruments.  This  chapter  will  be  devoted 
to  promissory  notes. 

Essentials  of  a  Promissory  Note. — The  promissory  note  is  one 
kind  of  negotiable  instrument.  It  originates  almost  invariably 
in  the  contracting  or  settlement  of  a  debt.  Money  may  be  bor- 
rowed, goods  purchased,  or  services  secured  on  the  basis  of  a 
formal  promise  to  pay  at  some  future  date.  An  old  account  or 
former  debt  may  be  due  and  an  extension  granted  only  on  the 
basis  of  the  formal  acknowledgment  of  the  debt  and  the  promise 
to  pay  it  as  evidenced  by  a  promissory  note. 
26 


402 


FUNDAMENTALS  OF  ACCOUNTING 


The  promissory  note  must  meet  the  first  four  requirements  of 
the  negotiable  instrument  enumerated  above.  In  addition 
certain  non-essential,  but  almost  standard  and  invariable, 
requirements  are: 

i.  Date. 

2.  Place  where  drawn  or  where  payable. 

3.  Use  of  the  words  "  value  received." 

Form  of  a  Promissory  Note. — The  information  contained  in 
a  promissory  note  may  be  arranged  in  any  form  and  may  be  in 
pencil  or  ink.  The  intention  of  the  party  to  be  bound  by  his 
promise  is  the  essential  content. 

However,  as  a  result  of  the  extensive  use  of  notes,  standard 
forms,  easy  of  recognition,  have  been  adopted.  Forms  20(a)  and 
20(b)  illustrate  those  generally  used. 


i»gB.flte.tfw.aB.rta,WPW 


cJZ-iL 


^fe^^^^,*^^!^^^^ \l3zZW 


— ■— 


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J^d^i&dA. 


Form  20.     (a)   Promissory  Note  without  Interest 


■■■——I—— — ■ 


AUG  29j92f 


Za0 


Form  20.     (b)  Promissory  Note  with  Interest 


PROMISSORY  NOTES  403 

The  student  will  examine  the  above  notes  to  see  if  they  meet 
the  essential  conditions.  Note  that  certain  wording  remains  prac- 
tically the  same  in  all.  This  wording  may  be  printed,  whereas 
the  portions  which  differ,  namely,  the  date,  the  amount,  and  the 
names  of  the  parties,  are  usually  written.  It  is  especially  impor- 
tant that  the  name  of  the  man  who  makes  the  promise  shall  be  in 
his  own  handwriting,  that  is,  his  legal  signature.  In  the  forms 
given  there  are  two  parties  to  the  note :  the  one  who  makes  the 
promise  known  as  the  maker,  and  the  other  in  whose  favor  it  is 
drawn,  that  is,  the  one  to  whom  the  promise  is  made,  known 
as  the  payee. 

Definition  of  a  Promissory  Note. — In  the  terms  of  the  Nego- 
tiable Instruments  Law  the  promissory  note  is  denned  as  "an 
unconditional  promise  in  writing  made  by  one  person  to  an- 
other, signed  by  the  maker  engaging  to  pay  on  demand  or  at 
a  fixed  or  determinable  future  time  a  sum  certain  in  money  to 
order  or  to  bearer."  One  or  two  of  these  characteristics  require 
explanation. 

An  "unconditional  promise"  is  an  absolute  promise  not 
conditioned  upon  the  happening  of  any  event  other  than  the 
passing  of  time.  An  "unconditional  promise  to  pay  on  demand  " 
means  whenever  payment  is  demanded.  To  pay  "at  a  fixed  or 
determinable  future  time"  means  that  the  date  of  payment  is 
definitely  stated  or  can  be  definitely  determined  from  the  state- 
ment in  the  instrument.  Note  that  a  negotiable  promissory 
note  is  a  promise  to  pay  a  definite  sum  in  money.  A  promise 
to  pay  in  terms  of  any  other  kind  of  property,  for  example, 
wheat,  coal,  etc.,  is  not  a  negotiable  promissory  note,  since 
only  money  payment  will  satisfy  the  requirements.  The  words 
"to  the  order  of"  make  possible  the  transfer  of  the  instru- 
ment from  hand  to  hand,  the  original  payee  designating  a  new 
payee,  who  may  in  turn  designate  another  payee,  etc.,  inde- 
finitely within  the  time  limit  of  the  instrument.  The  words  "or 
bearer,"  when  used  in  a  promissory  note,  make  it  possible  for 


404  FUNDAMENTALS  OF  ACCOUNTING 

anyone  possessing,  that  is,  bearing  the  note,  to  collect  it  in 
accordance  with  the  time  limit  set  and  so  become  the  payee 
of  the  note. 

Advantages  of  the  Promissory  Note. — Some  of  the  advantages 
of  the  promissory  note  are: 

i.  It  is  presumed  that  no  man  will  make  a  formal  promise  to 
pay  a  sum  of  money  unless  he  owes  it.  The  fact  that  he  does 
make  such  a  promise  is  taken  as  good  evidence  that  he  owes  the 
amount  promised.  In  terms  of  the  law  this  is  expressed  by  the 
phrase,  "a  consideration  is  presumed."  In  this  connection  the 
word  "consideration"  means  anything  of  value,  that  is,  a  man 
will  not  make  a  formal  promise  to  pay  unless  he  has  received 
something  of  value  in  return. 

2.  A  promissory  note  is  easily  transferred  from  hand  to 
hand. 

3.  The  amount  to  be  paid  is  definitely  stated  and  is  not 
subject  to  proof  or  controversy. 

4.  The  note  bears  interest,  either  from  its  date  of  making  or 
its  date  of  maturity. 

Through  the  use  of  the  words  "to  the  order  of"  and  "or 
bearer"  the  payee  designated  in  the  note  may  order  that  it  be 
paid  to  someone  else,  who  may  in  turn  transfer  his  right  to  an- 
other party,  etc.  If  the  note  is  payable  "to  bearer,"  it  may  be 
transferred  merely  by  delivering  it;  if  payable  "to  the  order  of," 
both  indorsement  and  delivery  are  necessary.  The  indorsement, 
that  is,  the  signature  of  the  named  payee,  must  usually  be  made 
on  the  reverse  side  of  the  note  and  the  note  delivered  to  the  new 
payee. 

Forms  of  Indorsement. — A  promissory  note  may  be  indorsed 
in  three  ways.     These  are: 

1 .  The  unqualified  indorsement 

2.  The  qualified  indorsement 

3.  The  restrictive  indorsement 


PROMISSORY  NOTES 


405 


1.  The  unqualified  indorse- 
ment (see  Form  21a)  may  be  made 
in  either  one  of  two  ways.  It  may 
be  made  in  blank  by  the  signing  of 
the  payee's  name  with  no  other 
word  added.  This  is  called  a  blank 
indorsement  and  since  it  does  not 
name  the  new  payee,  its  effect  is  to 
permit  the  collection  of  the  note 
by  anyone  into  whose  possession  it 
may  fall.  It  has  the  same  effect 
as  the  words  "or  bearer"  on  the 
face  of  the  note. 

An  unqualified  indorsement 
may  also  be  made  by  designating 
the  new  payee.  The  customary 
phraseology  of  this  full  indorse- 
ment is  as  follows:  "Pay  to  the 
order  of  James  Grover,"  followed 
by  the  signature  of  the  former 
payee,  in  this  case  George  Strong. 
The  effect  is  to  limit  payment  of 
the  note  to  the  stated  payee  or  to 
his  order,  so  that  he  may  in  turn 
order  payment  made  to  someone 
else. 

2.  A  qualified  indorsement  (see 
Form  2  ib)  usually  contains  the 
words  "without  recourse"  and 
might  read:  "Pay  to  the  order  of 
James  Grover  without  recourse, 
George  Strong."  The  effect  of 
this  indorsement  is  to  free  George 
Strong  from  liability  for  payment 
of  the  note  in  case  the  original 


Form  21.    (a)  Forms  of  Unqualified 
Indorsement 


Blank  Indorsement 


Pay  to  the  order  of 
James  Grover 
George  Strong 


Indorsement  in  Full 


Form  21.   (b)  Form  of  Qualified 
Indorsement 


Pay  to  the  order  of 
James  Grover 
Without  recourse 
George  Strong 

Indorsement  without  Recourse 


Form  21.   (c)  Forms  of  Restrictive 
Indorsement 


Pay  to 
The  Merchants  Bank 
for  collection 

George  Strong 

Indorsement  for  Collection 


406 


FUNDAMENTALS  OF  ACCOUNTING 


Form  21.     (c)  Forms  of  Restrictive 
Indorsement  (Continued) 


Pay  to  the  order  of 
The  Merchants  Ban\ 
for  deposit  only 
George  Strong 

Indorsement  for  Deposit 


Pay  to 
James  Scott 
only 
George  Strong 


Indorsement  to  Transferee  only 


Pay  to  the  order  of 
James  Scott 
waiving  protest 
George  Strong 


maker  should  not  pay  it  when  due. 
Legally  any  indorser  guarantees 
payment  of  the  note  to  the  new- 
payee  in  accordance  with  the 
terms  stated  on  its  face.  In  the 
event  that  the  maker  does  not 
pay,  the  indorser  may  be  held 
liable  for  payment.  It  is  only  be- 
cause of  this  guarantee  that  the 
note  passes  readily  from  hand  to 
hand.  The  effect  of  the  qualified 
indorsement  is  to  free  the  in- 
dorser from  this  liability.  He 
does  guarantee,  however,  that  the 
note  is  regular  in  all  respects,  in 
that  there  has  been  no  fraud  in  its 
execution,  and  that  the  signatures 
of  all  parties  and  indorsers  are 
regular  and  not  fraudulent. 

3.  The  restrictive  indorsement 
(see  Form  21c)  may  restrict  the 
new  payee  as  to  his  use  of  the 
funds  collected  or  may  restrict 
The  following  are  types  of 


Indorsement  Waiving  Protest 

payment  to  a  designated  party 
restrictive  indorsements : 

(a)  "Pay  to  the  Merchants  Bank  for  collection."  This  al- 
lows the  Merchants  Bank  only  to  collect  the  note  for  someone 
else,  the  funds  collected  to  be  turned  over  to  that  party. 

(b)  "  Pay  to  the  order  of  the  Merchants  Bank  for  deposit  only." 
The  effect  of  this  is  practically  the  same  as  that  of  form  (a),  the 
Merchants  Bank  being  appointed  a  collection  agent  for  the  payee 
of  the  note,  the  funds  to  be  deposited  to  his  credit  in  that  bank. 

(c)  "Pay  to  James  Scott  only."  This  indorsement  restricts 
payment  to  James  Scott  and  stops  the  negotiability  of  the  note. 
Scott,  however,  may  assign  the  note  to  another  party. 


PROMISSORY  NOTES  407 

(d)  "Waiving  protest,  pay  to  the  order  of  James  Scott, 
George  Strong,"  will  be  explained  later,  on  page  413. 

Successive  Indorsements.— Standard  practice  is  to  write  the 
indorsement  across  the  left  end  of  the  note  on  the  reverse  side 


Form  22.     Note  Showing  Indorsements 

(see  Form  22).  There  may  be  any  number  of  indorsements.  If 
there  is  not  sufficient  space  for  all  indorsements  a  strip  of  paper, 
called  an  "allonge,"  may  be  attached  to  the  note. 

A  note  may  be  transferred  any  time  within  the  time  limit, 
that  is,  any  time  before  its  due  date.  Transfer  may  even  be 
made  after  that  date,  but  such  a  transfer  does  not  carry  with  It 
the  guaranty  of  the  indorsers  as  to  payment.     If  there  are  five 


408  FUNDAMENTALS  OF  ACCOUNTING 

indorsements  on  a  note,  the  sixth  party  being  the  holder  of  the 
note  and  therefore  the  one  to  whom  payment  is  to  be  made,  and 
if  such  payment  is  not  made  by  the  maker  at  maturity,  the  sixth 
party  must  look  to  the  last  indorser,  that  is  the  fifth  party,  for 
payment,  because  in  transferring  the  note  to  him  this  party 
guaranteed  its  payment.  The  fifth  party  may  in  turn  look  to 
the  fourth  party  for  payment  for  the  same  reason.  Similarly 
the  fourth  party  may  hold  the  third,  the  third  the  second,  and 
the  second  the  first.  The  first  indorser  is,  of  course,  the  original 
payee  and  must  rest  his  claim  for  payment  against  the  maker  of 
the  note  who  originally  promised  to  pay.  The  way  in  which  this 
liability  of  the  successive  indorsers  is  rendered  effective  will  be 
discussed  later  under  "Dishonored  Notes." 

The  names  "indorser"  and  "indorsee"  are  sometimes  given 
respectively  to  the  party  making  the  indorsement  and  to  the 
new  payee  named  in  the  indorsement.  Thus,  in  the  indorsement, 
"Pay  to  the  order  of  James  Grover,  (signed)  George  Strong," 
George  Strong  is  the  indorser  and  James  Grover  the  indorsee. 
If  James  Grover  indorses  the  note  over  to  Richard  Jones,  James 
Grover  becomes  the  indorser  and  Richard  Jones  the  indorsee. 

Who  is  the  Holder  in  Due  Course? — The  negotiation  of  a 
note  raises  the  question  as  to  who  is  a  bona  fide  holder,  or  a 
"holder  in  due  course,"  as  the  law  expresses  it.  A  promissory 
note  is  a  definite  contract,  which  must  be  lived  up  to  in  all  respects 
to  make  it  fully  enforcible.  The  person  receiving  a  note  by 
transfer  from  another  party  is  expected  to  examine  it  to  see  that 
it  is  regular  and  complete  in  all  respects.  The  points  to  be  noted 
are  as  follows: 

i.  On  the  date  it  is  received  the  note  must  not  be  overdue. 
The  man  who  accepts  an  overdue  note  is  held  to  be  aware  of  the 
fact  that  the  payment  date  has  passed,  and  that  therefore  the 
guaranties  of  the  previous  indorsers  no  longer  hold  good,  since 
the  note  was  not  presented  for  payment  when  it  became  due,  or 
if  presented,  payment  was  not  secured. 


PROMISSORY  NOTES  409 

2.  The  note  must  indicate  by  the  way  in  which  it  is  drawn 
that  it  is  complete  and  regular  and  issued  in  the  regular  course 
of  business.  This  means  that  there  are  no  erasures,  no  blanks, 
and  that  all  of  the  essentials  of  a  negotiable  note  have  been 
observed. 

3.  The  note  must  be  taken  for  value  and  in  good  faith, 
that  is,  there  must  not  be  a  fraudulent  transfer.  By  "value"  is 
meant  any  consideration  sufficient  to  support  an  ordinary 
contract. 

4.  The  holder  when  he  receives  the  note  must  not  have  notice 
of  any  defect  or  irregularity  in  the  instrument  which  would  in- 
validate or  impair  the  contract.  If  he  has  such  knowledge,  he  is 
not  in  the  sight  of  the  law  the  holder  in  due  course.  It  is  ordin- 
arily held  that  the  owner  of  a  note  cannot  transfer  to  another  any 
better  title  than  he  himself  possesses. 

5.  A  man  becomes  a  holder  in  due  course  when  he  secures 
title  by  transfer  from  another  who  has  good  title,  that  is,  is  himself 
a  holder  in  due  course. 

Rights  of  a  Holder  in  Due  Course. — The  owner  of  a  promis- 
sory note  is  in  a  very  strong  position  as  a  holder  in  due  course, 
and  is  entitled  at  law  to  collect  the  amount  of  the  note,  when 
due,  from  the  maker  even  though  there  may  have  been  irregu- 
larities previous  to  the  time  that  the  present  holder  acquired  the 
note.  Thus,  if  through  force  A  makes  a.  note  in  favor  of  B,  as 
between  A  and  B,  B  could  not  collect  the  note  because  A  could 
set  up  the  defense  that  he  had  been  forced  against  his  will  to  give 
the  note  to  B.  If,  however,  B  transfers  the  note  to  C  who  knows 
nothing  of  the  way  in  which  B  obtained  it,  C  becomes  a  holder 
in  due  course  and  will  be  able  to  collect  from  A.  The  law,  of 
course,  gives  A  proper  remedy  against  B.  In  order,  however,  for 
the  note  to  pass  from  hand  to  hand  and  to  place  it  above  sus- 
picion, a  holder  in  due  course  is  allowed  to  hold  the  maker  of  the 
note  to  the  exact  terms  of  the  contract.  Fraud,  want  of  con- 
sideration, failure  of  title  in  one  of  the  indorsers,  and  in  most 


410  FUNDAMENTALS  OF  ACCOUNTING 

cases  even  illegality,  are  not  defenses  which  the  maker  can  set  up 
against  payment  of  the  note.  A  few  defenses,  such  as  forgery, 
alteration,  infancy,  and  improper  execution  and  delivery,  are 
good  even  against  a  holder  in  due  course. 

Notes  Classified  as  to  Maker. — Notes  may  be  classified  from 
the  standpoint  of  a  given  business  on  the  basis  of  the  maker  of 
the  note.  On  this  basis  there  are  two  kinds  of  notes,  namely 
notes  receivable  and  notes  payable. 

Notes  Receivable.  A  note  made  by  others  payable  to  the 
proprietor  is  a  note  receivable,  as  illustrated  in  Form  23.  In  this 
case  the  payee,  James  Jackson,  the  owner  of  the  business,  has 
received  a  written  promise  to  pay  money  from  a  customer,  George 
Strubie. 


No.  9. 
Three  months 

New  York, 
after  date 

Novtmber  3, 
'     promise 

192    ' 
to  pay  to 
$417.25 

the  order  of  Jamcs  Jackson 

Four  Hundred  Seventeen  and  25/100 

Dollars 

at  THE  PARK  NATIONAL  BANK  of  New  York 
Value  received     with  interest 
Due    M-  3.  1922 

George 

Strubie 

Form  23.    Note  Receivable 

The  note  may  be  with  or  without  interest.  The  one  illus- 
trated is  interest-bearing  from  the  date  of  the  note.  Whether 
interest  shall  or  shall  not  be  charged  depends  upon  the  will  of  the 
parties.  It  is  held  at  law,  however,  that  a  non-interest-bearing 
note  will  bear  interest  after  its  due  date.  In  other  words,  a  non- 
interest-bearing  note  which  is  not  paid  at  maturity,  will  bear 
interest  from  that  date  until  paid. 

Notes  Payable.  A  note  made  (signed)  by  the  proprietor  in 
favor  of  others  is  a  note  payable  from  the  maker's  point  of  view. 


PROMISSORY  NOTES  41 1 

Thus,  the  note  shown  in  Form  24,  made  by  James  Jackson,  the 
proprietor  of  the  business,  is  to  him  a  note  payable.  To  George 
H.  Sherman  and  Company  it  is  a  note  receivable.  The  party 
who  makes  (signs)  a  note  classifies  it  as  a  note  payable,  while 
the  party  in  whose  favor  it  is  made  (payee)  classifies  it  as  a 
note  receivable.  The  one  by  whom  the  note  is  to  be  paid  lists 
it  as  a  liability  while  the  one  to  whom  it  is  to  be  paid  lists  it  as 
an  asset. 


No.  //.                                                               New  York,  November  3,     ig2_J__ 

Three  months after  date  ^       promise  to  pay  to 

the  order  of         George  H.  Sherman  and  Company  $625 7^73 

Six  Hundred  Twenty-five  &  45/100  Dollars 

at  THE  FIFTH  AVENUE  BANK  of  New  York 

Value  received 

Due     F^-  3-  W22  James  Jackson 


Form  24".     Note  Payable 

Notice  that  this  is  a  non-interest-bearing  note.  All  notes 
are,  of  course,  either  interest-bearing  or  non-interest-bearing, 
according  to  the  will  of  the  parties. 

Payment  of  a  Note. — When  a  note  falls  due  it  must  be  pre- 
sented for  payment.  Therefore  it  is  necessary  to  know  the 
business  customs  and  the  law  of  the  place  where  it  is  payable. 
The  place  may  be  specified  on  the  face  of  the  note  as  in  Form  24, 
in  which  case  it  is  payable  only  at  that  place.  The  place  may  be 
the  maker's  office  or  residence,  his  bank,  or  any  other  place 
mutually  agreed  upon.  If  the  maker's  bank  is  named,  this  con- 
stitutes an  order  on  the  bank  to  pay  the  note  when  due  and  charge 
the  amount  to  the  maker's  bank  account.  If  no  place  is  specified, 
presentation  at  the  maker's  place  of  business  or  at  his  residence 
is  considered  all  that  is  required  of  the  holder  of  the  note. 


412  FUNDAMENTALS  OF  ACCOUNTING 

As  to  what  constitutes  "presentation  for  payment"  is  some- 
times a  nice  question.  The  student  should  be  informed  as  to  the 
law  on  this  point.  Where  a  note  is  made  payable  at  a  given 
place,  it  must  be  presented  at  that  place  to  the  maker  of  the  note 
or,  if  he  is  absent,  to  any  person  in  charge.  If  the  maker  is  dead, 
the  presentation  should  be  to  the  executor  or  administrator 
of  his  estate.  The  holder  must  show  the  instrument  and  demand 
payment.  If  payment  is  made,  the  note  must  be  surrendered  to 
the  maker.  As  to  time  of  presentation,  the  note  must  be  pre- 
sented on  the  day  stated  or  determined  to  be  the  maturity  date 
of  the  instrument.  A  note  falling  due  on  Sunday  or  a  legal 
holiday  is  payable  on  the  next  business  day.  A  note  falling 
due  on  Saturday,  where  Saturday  is  a  half-holiday,  must  be 
presented  by  12  o'clock  noon  Saturday  or  on  the  succeeding 
Monday. 

Presentation  must  be  made  at  a  reasonable  hour  on  the  busi- 
ness day.  This  means  that  the  holder  must  observe  the  business 
custom  as  to  opening  and  closing  hours  at  the  place  of  payment. 
It  has  been  held  in  some  cases  that  presentation  may  be  made  at 
the  residence  of  the  maker  after  business  hours. 

At  this  point  the  student  should  review  Chapter  XVI  as  to 
the  determination  of  the  date  of  maturity,  the  amount  due,  and 
the  proceeds  of  a  discounted  note. 

Dishonoring  Notes. — A  note  not  paid  by  its  maker  at  ma- 
turity is  said  to  be  dishonored,  that  is,  the  maker  does  not  live 
up  to  or  honor  his  formal  contract.  When  a  note  is  dishonored, 
in  order  to  protect  the  holder's  rights,  it  is  customary  to  make 
what  is  called  a  iormal  protest.  The  student  will  recall  that  when 
a  note  is  negotiated,  each  holder  accepts  the  note  on  the  basis  of 
the  guaranty  of  its  collectibility  by  the  previous  holder.  The 
holder  of  the  note  in  whose  possession  it  is  dishonored  will,  there- 
fore, look  to  the  party  from  whom  he  received  it  for  payment. 
That  party  may  in  turn  look  to  the  party  from  whom  he  received 
it,  etc.     In  order,  however,  to  compel  payment  by  a  previous 


PROMISSORY  NOTES  413 

holder,  notice  must  be  given  to  him  by  the  present  holder,  his 
agent,  or  by  a  notary.  The  law  requires  that  this  notice  be 
given  on  the  day  following  the  day  of  dishonor.  If  the  party  to 
whom  notice  is  to  be  sent  has  placed  his  address  on  the  instru- 
ment, notice  must  be  sent  to  that  address;  otherwise  to  his  place 
of  business  or  his  residence.  If,  in  transferring  title  to  the  note, 
any  indorser  has  signed  it.  using  the  words,  "waiving  notice  of 
protest,"  such  indorser  can  be  held  without  giving  him  formal 
notice  of  protest  within  the  customary  day  limit  set  for  such 
notice.  Unless,  however,  such  notice  is  given  to  all  other  in- 
dorsers  within  the  day  limit,  they  are  released  from  their  guaranty 
and  no  action  can  be  instituted  against  them  for  the  collection  of 
the  note.  The  holder  must,  in  this  case,  collect  the  note  from  the 
maker  by  process  of  law.  The  procedure  of  formal  protest  is 
somewhat  as  follows : 

The  holder  of  a  dishonored  note  goes  before  a  notary  and 
makes  a  sworn  statement  of  air  the  facts  in  the  case,  chief  of 
which  are  that  he  holds  a  note  now  due  and  payable  by  its  maker, 
that  presentation  for  payment  has  been  made,  that  payment  has 
been  refused,  or  that  presentation  was  impossible  because  of  in- 
ability to  find  the  maker  at  his  customary  place  of  business  or 
residence.  The  notary  enters  these  facts  in  his  notarial  record, 
takes  the  note,  and  himself  attempts  presentation  for  payment. 
If  payment  is  still  refused,  the  notary  sends  formal  notices  to  that 
effect  to  all  the  previous  holders  whom  it  is  desired  to  hold  to 
their  contracts  of  guaranty,  if  their  addresses  are  known.  If 
not  known,  the  notices  are  sent  to  the  next  previous  holder  who 
takes  his  and  in  turn  sends  them  on  to  the  holder  from  whom  he 
received  the  note,  etc.,  until,  in  due  course,  all  notices  of  dishonor 
have  been  delivered  to  the  proper  parties.  In  this  way  each 
holder  may  collect  from  the  next  previous  holder  until  the  original 
payee  is  reached,  who  must  look  to  the  maker  of  the  note  for 
satisfaction.  In  Forms  25  and  26  are  given  illustrations  of  the 
protested  note,  the  certificate  of  protest,  and  the  notice  of 
dishonor.     These  are  self-explanatory. 


4H 


FUNDAMENTALS  OF  ACCOUNTING 


§.<OQ^= 


WOkU 


«jg.*4  lt-aj>syJi.  .^^.^lAJL^l. 


'o^^a-e,  j!  sfar-*t^*-ey 


Unitfb    &tatfB   of  Arnrrira. 
&tatr  of  Nno  Hark. 

City  BfNiwTotK, 


On  the  seventh 


d>,„,_A&ly..  1921  i* 


h  .he  request  of-Charies.  8.  Bicharaaon  _ « 

I Jlftlpfc„Steven8  .  — : : _ 

duly  commissioned  and  sworn,  dwelling  in     BlW.XOXt   City. 
presen.the  original     promiBBOry  nOt«__-r-- 

io_G*Qr-g«L-l»_Mpnr.p« 


i  Notary  Public  of  the  Sale  of  New   York, 


'hereunto  annexed. 


.the  raakexlB _cff loe»  -44  W»ar_5lrB»i^Jia«_IorJtJ?lty^ 


and  demanded.   Parent .-----—----- thereof,   which  wa.    wlyKdAeCaUBO  _Ojf _  inability 

to  locate  maker. 

iShrrPUpfln  l,    the    said    Notary,    at   the   request    aforesaid,     did   fsrfllPfil,  and         these  presents 
do     publicly    and     solemnly    prBIPBT,  as   well     against    the   Drawer         and     Endorser  of    the     said 

J^0i;l880ry_nj?te_^--"--T?--  as   against   all  others   whom  it  doth  or  may  concern,  for  exchange. 
re-exchange-  and   all  cost,    damages   and    interest   already    incurred,    and  to  be  hereafter  incurred    for   warn   of 

.paymiMlt  .-- ------ — — — ——--—-— —™0| ,(,.  amt 

SllUB   Soil?  attt)    JJratrStfll   in   the   City    of    New   York,     aforesaid,    in    the    presence    of 
John  Doe  and  Richard  Roe,  witnesses. 

.Votary    Public 


;._Balph- Stevens •-. — -— . — —_a  Notary  Pubt«- uf 

the  Stale  of  New  York,  duty  commissioned  and  sworn,  do  hereby  Certify 
that  on  the  Seventh  -— -T-T/oy   o/.July« one  thousand 


Inifro  0ia!r»  of  Xatrrln. 
€>t»te  of  New  flork.       ' 

Ctlg  df  Urm  fart.  I 

Cantraaf ) 

nt'rf  hundred  and  tWenty-03kY«e  notice  of  the  presentment  and  protest  of  the  sairfpxncilaB-Ory .  note 
after  demand  and  refusal  of  payment  thereof,  by  notice,  partly  written  and  partly  printed,  signed  by  me,  was 
given  by  me  to  the   maker   and...— --rejpecfu'e  endorsers  of  the  said  instrument,  by  depositing  the  same 

in  Me  Post  Office  at  the.  City    Of  Hew  Xork  _— . --?--< prepaying  the  postage  thereon),  d»ly 

directed  and superscribed  In  said  maker   and    ■ :-— — - — — — — — — """'*"" 

ei.i/or»er.,o./'oc(om,(oici..  To.George  T.  Monroe,  44_Wall  Street ,  MewYork -City 
ZrajiXJttJEaj5PiiB^22^JAFXejlce__Street.-XQnfe  


fo  above  named  place      being  the  reputed  place      of  residence  of  the  person      to  whom  such  notice  was 
so  addressed,  and  the  Post  Office  nearest  thereto. 

MtX  (Testimony  -BhPrPDf.  I  have  hereunto  set  aw  hand  and  affixed  my 
official  seal  at thfl-Vlty^of _HflB  Jferk_ 


.NOTARY'S. 
.      SEAL      . 


Notary  Public. 


Form  25.     Certificate  of  Protest 


PROMISSORY  NOTES 


415 


New  York. J.nly._7,____ 


19A 


gUaSe  tO   take  ||Otice,   That   a    Promissory  Note  made   by 
George  T.   Monroe, 


tp,    IlT»  annaraa  and  no/100  — .-— — .- -.-.-.-^.._^^-...PfflhrT 

dated  .January  7._1921 . * 

payable  ai    at  the  maker  \B_oXflce..__44.  WaUL.J3tx.eet..  _Hew_York  City 


eodorsed   by   you,   having    been    this    day     presented    for    payment    which    was    duly     demanded    and 
recused,   is  protested   for  non-payment,  aod  that  the  holder      looks    to  you  for  the  payment  thereof. 


Your  obedient  servant, 


&*Msi&z^^, 


To  Prank  1.  Parsons 

293  Lawrence  Street 
Yonkers,  New  York 


Notary  Public. 


Form  26.     Notice  of  Dishonor 


Recording  a  Dishonored  Note. — The  entries  to  record  on  the 
books  of  the  payee,  Frank  L.  Parsons,  the  payment  to  Richard- 
son for  the  dishonored  note  transaction  above  are  as  follows: 


Cash  Book  (Disbursements) 


1921 
July  9 


George  T.  Monroe 


Charles  S.  Richardson  check  for 
George  T.  Monroe's  6-mo.  note  dis- 
honored and  protested  7/7/21 
Face  500  - 

Protest  fees  2.50 


502 


50 


It  will  be  noted  that  the  customer  (maker)  is  charged,  in  his 
open  account,  with  the  amount  of  the  note  and  protest  fees.  The 
protest  fees  should  be  charged  to  the  maker,  and  not  to  an  ex- 
pense account,  because  the  maker's  failure  to  pay  his  note  has 
made  him  legally  liable  for  the  fees  also.    Although  the  holder 


416  FUNDAMENTALS  OF  ACCOUNTING 

(Charles  S.  Richardson)  returns  the  dishonored  note  to  the  payee 
after  protest,  the  payee  records  his  payment  of  the  note  and 
protest  fees,  not  in  the  Note  Receivable  account,  which  is 
reserved  only  for  unmatured  notes,  but  in  the  maker's  open  ac- 
count which  thus  shows  a  full  history  of  all  dealings  with  him 
and  will  serve  as  a  guide  in  future  dealings.  Although  the  pro- 
tested note  is  still  a  note  receivable,  the  entry  to  record  collection 
from  the  maker  will  be  a  debit  to  Cash  and  a  credit  to  George  T. 
Monroe's  open  account. 

Questions 

i.  What  was  the  origin  of  paper  money? 

2.  What  do  you  understand  by  the  standard  Negotiable  Instruments 
Law? 

3.  Explain  what  you  understand  by  a  negotiable  instrument.     Give 
some  examples. 

4.  Give  some  uses  and  advantages  of  negotiable  instruments. 

5.  What  does  the  word,  "negotiable,"  mean? 

6.  Name  and  explain  the  requirements  necessary  to  make  an  instru- 
ment negotiable. 

7.  Name  several  uses  of  the  promissory  note.    What  are  its  essentials? 
What  the  non-essentials?     Explain  these  fully. 

8.  Explain  the  two  terms  "maker"  and  "payee"  as  used  in  connec- 
tion with  a  note. 

9.  How  is  a  promissory  note  negotiated  or  transferred? 

10.  Explain  fully  the  three  kinds  or  forms  of  indorsements,  showing 
how  each  is  written. 

11.  What  is  the  legal  effect  of  an  indorsement? 

12.  How  many  indorsements  may  a  note  have? 

13.  Who  is  an  indorsee? 

14.  What  is  meant  by  a  holder  in  due  course? 

15.  Distinguish  between  a  note  receivable  and  a  note  payable. 

16.  Where  is  a  note  payable? 

17.  What  is  meant  by  presentation  for  payment?    How  is  presen- 
tation legally  made? 

18.  How  do  you  find:  (a)  the  date  of  maturity  of  a  note;  (b)  the 
amount  due;  (c)  the  proceeds  of  a  discounted  note? 

19.  When  is  a  note  said  to  be  dishonored?    State  the  necessary  pro- 
cedure of  formal  protest. 


PROMISSORY  NOTES  417 

20.  What  entries  are  made  when  a  note  receivable  is  dishonored  and 
protested? 

21.  Should  the  Note  Receivable  account  contain  any  past-due  notes? 
Explain. 

22.  What  is  the  purpose  of  transferring  past-due  notes  to  the  custo- 
mer's account?     Of  what  use  is  the  information  in  the  customer's  account  ? 

Problems 

1.  On  February  26,  19 — ,  Thomas  Southmayd  of  Duluth,  Minn., 
gives  you  a  90-day,  6%  interest-bearing  note,  dated  February  25,  19 — ,  in 
settlement  of  his  account,  amounting  to  $353.42.  The  note  is  payable  at 
the  Empire  Commercial  Bank  of  Duluth,  Minn. 

(a)  Write  the  note. 

(b)  Give  the  entry  to  be  made  by  the  maker  at  the  time  he  issues  the 
note. 

(c)  Give  the  entry  to  be  made  by  the  payee  at  the  time  he  receives 
the  note. 

(d)  Give  the  maker's  entry  when  he  pays  the  note. 

(e)  Give  the  payee's  entry  when  he  receives  payment  for  the  note. 

2.  On  November  20,  19 — ,  you  give  your  90-day,  6%  interest-bearing 
note  to  the  National  Garment  Company  of  Rochester,  N.  Y.,  in  settle- 
ment of  your  account,  which  amounts  to  $463.75.  Note  is  payable  at  your 
address. 

(a)  Write  the  note. 

(b)  Give  your  entry  at  the  time  you  issue  the  note. 

(c)  At  the  time  you  pay  the  note. 

(d)  Give  the  entry  to  be  made  by  the  payee  at  the  time  the  note  is 
received. 

(e)  At  the  time  the  note  is  paid. 

3.  On  October  25,  19 — ,  P.  R.  Griffin,  Holyoke,  Mass.,  discounts  his 
6%,  90-day  note,  amounting  to  $500,  with  the  Holyoke  National  Bank. 

(a)  Write  the  note. 

(b)  Give  the  entry  to  be  made  by  the  maker  when  the  note  is  dis- 
counted. 

(c)  At  the  time  the  note  is  paid. 

4.  On  June  10,  19 — ,  the  National  Grocery  Company  of  Pittsburgh, 
Pa.,  receives  a  90-day,  non-interest-bearing  note  for  $355.25  from  C.  E. 
Thomas,  Erie,  Pa.,  in  settlement  of  his  account,  which  amounts  to  $350. 
The  note  is  payable  at  Erie,  Pa.,  and  includes  6%  interest. 

27 


418  FUNDAMENTALS  OF  ACCOUNTING 

(a)  Write  the  note. 

(b)  Give  the  entry  to  be  made  by  the  maker  at  the  time  the  note  is 
issued. 

(c)  Give  the  entry  to  be  made  by  the  payee  at  the  time  the  note  is 
received. 

5.  On  September  9, 1 9 — ,  the  National  Grocery  Company,  Pittsburgh, 
Pa.,  receives  a  formal  notice  of  protest,  stating  that  C.  E.  Thomas,  Erie, 
Pa. ,  refused  to  pay  his  90-day  note  for  $3 5 5 . 2 5  on  which  the  fees  are  $  1 . 50. 
Write  the  entry  to  be  made  by  the  company  at  the  time  they  pay  the 
protested  note. 

6.  On  July  10,  19 — ,  G.  W.  Peck,  Elmira,  N.  Y.,  transfers  to  you  by 
full  indorsement  a  3-months,  6%  interest-bearing  note  for  $250  which  he 
had  received  from  a  customer,  L.  B.  Laughlin  of  Hudson,  N.  Y.  The  note 
is  dated  June  10,  19 — ,  and  is  payable  at  the  Hudson  Commercial  Bank, 
Hudson,  N.  Y.  Mr.  Peck  requests  you  to  apply  the  note  with  the 
accrued  interest  to  his  account. 

(a)  Write  the  note  and  the  indorsement. 

(b)  Give  the  entry  to  be  made  by  the  maker,  L.  B.  Laughlin,  at  the 
time  the  note  is  issued. 

(c)  At  the  time  the  note  is  paid. 

(d)  Give  the  entry  you  would  make  at  the  time  the  note  is  received. 

(e)  At  the  time  the  note  is  paid. 

(f)  Give  the  entry  the  payee  would  make  at  the  time  the  note  is 
transferred. 

7.  You  are  auditing  the  books  of  A.  O.  Scott,  Fitchburg,  Mass.,  and 
you  find  that  he  possesses  a  3-months,  6%  interest-bearing  note  for  $250, 
dated  October  31,  19 — ,  made  by  Clinton  Moore  of  Haverhill,  Mass., 
payable  to  the  holder  at  Haverhill. 

(a)  Write  the  note. 

(b)  Give  the  entry  to  adjust  the  interest  account  at  the  time  of  closing 
the  books,  December  31,  19 — . 

8.  On  June  1,  19 — ,  Frank  H.  Ross  of  Lynn,  Mass.,  purchases  from 
C.  H.  Humphreys,  Lawrence,  Mass.,  a  3-months,  6%  interest-bearing 
note  for  $650,  dated  April  1,  19—,  made  by  George  W.  Smith  of  Lowell, 
Mass.,  and  payable  at  Lowell.  The  note  is  transferred  to  Mr.  Ross  by  a 
blank  indorsement.  The  purchase  price  includes  the  interest  accrued  to 
June  1. 

(a)  Write  the  note  and  its  indorsement. 

(b)  Give  the  entry  to  be  made  by  the  payee,  Mr.  Humphreys,  at  the 
time  the  note  is  transferred. 


PROMISSORY  NOTES 


419 


(c)  Give  the  entry  to  be  made  by  the  purchaser  at  the  time  the  note 
is  purchased. 

9.  On  July  1,  19—,  F.  H.  Ross  is  notified  that  George  W.  Smith  has 
dishonored  the  note  of  April  1,  19—,  amounting  to  $650. 

(a)  Write  the  entry  to  be  made  by  Ross. 

(b)  Write  a  brief  letter  to  Mr.  Ross,  stating  the  procedure  necessary  to 
hold  C.  H.  Humphreys  liable. 

10.  On  June  25,  19—,  Robert  J.  Hicks  of  Lancaster,  Pa.,  gives  his 
60-day,  non-interest-bearing  note  for  $1,200  to  the  Adams  Merchandising 
Company,  of  New  York  City,  for  purchases  made  on  account  from  the 
latter  firm. 

(a)  Write  the  note. 

(b)  Give  the  entry  to  be  made  by  the  maker  at  the  time  he  issues  the 
note. 

(c)  Give  the  entry  to  be  made  by  the  payee  at  the  time  the  note  is 
received. 

11.  The  Adams  Merchandising  Company,  wishes  to  transfer  the  above 
note  to  R.  H.  Glenn  without  being  held  liable  for  payment.  The  note  is 
transferred  on  May  25, 19 — ,  in  payment  of  a  debt  owed  by  the  company. 

(a)  Write  the  proper  indorsement. 

(b)  Give  the  entry  to  be  made  by  the  transferror  at  the  time  the  note  is 
transferred. 

(c)  Would  the  transferror  make  an  entry  at  the  time  the  note  is  paid? 
Why? 

(d)  Give  the  entry  to  be  made  by  the  transferee  at  the  time  the  note 
is  received. 

(e)  At  the  time  the  note  is  paid. 

(f)  Give  the  entry  to  be  made  by  the  maker  at  the  time  the  note  is 
paid. 

12.  W.  P.  Johnson  of  Galveston,  Texas,  is  the  holder  of  a  90-day,  6% 
interest-bearing  note,  amounting  to  $525,  dated  April  15,  19 — ,  made  by 
J.  W.  Hartman  of  Houston,  Texas,  a  customer  of  his,  the  note  being  pay- 
able at  Houston.  The  note  is  presented  for  payment  on  its  due  date,  but 
payment  is  refused. 

(a)  Write  the  note. 

(b)  Give  the  entry  to  be  made  by  the  payee  at  the  time  the  note  is 
dishonored. 

13.  The  Heyden  Chemical  Company  of  New  York  City  is  the  holder 
of  a  60-day,  non-interest-bearing  note,  dated  October  15,  19 — ,  made  by 


420  FUNDAMENTALS  OF  ACCOUNTING 

the  Meyers  Drug  Company  of  Albany,  N.  Y.,  for  $250,  payable  at  the 
latter's  place  of  business.  On  its  due  date  the  maker  is  not  able  to  pay  the 
note,  but  sends  a  check  for  $100,  drawn  on  the  Albany  Trust  Company 
and  a  60-day,  6%  interest-bearing  note  for  $150,  to  cover  payment  of 
maturing  note. 

(a)  Write  the  first  note. 

(b)  Write  the  second  note. 

(c)  Give  the  entry  to  be  made  by  the  Heyden  Chemical  Company,  at 
the  time  the  check  and  the  $150  note  are  received. 

(d)  Give  the  entry  to  be  made  by  the  maker  at  the  time  the  second 
note  is  issued. 

14.  A  series  of  transactions  to  be  recorded  in  the  bound  blank  books 
provided — a  continuation  of  Problem  14,  Chapter  XXIV. 

This  is  a  continuation  of  Mr.  Thatcher's  business  for  the  month  of 
January,  19 — .  As  bookkeeper,  you  will  record  the  following  trans- 
actions in  sales  journal,  page  29,  purchase  journal,  page  31,  cash  book, 
page  18,  in  addition  to  the  general  journal  and  ledger  you  used  in  Chapter 
XXIV. 

January,  19 — . 

2.  Sold  $750  of  merchandise  to  Homer  Welbrun,  St.  Joseph,  Mo., 

terms  20-day  note  with  interest.  Bought  merchandise  from 
H.  M.  Scott  and  Company,  Denver,  Colo.,  $2,200,  on  our  60- 
day  note  with  interest  at  6%. 

3.  Received  check  from  Roy  A.  Parks,  Columbus,  Ohio,  in  full  of  his 

account,  less  2%.  Paid  office  clerks'  salaries  in  cash  $125. 
This  includes  the  $50  of  salaries  accrued  to  December  31. 
Sent  Allen  and  Company  our  check  for  $1 20  in  full  payment  for 
interest  accrued  on  mortgage  to  December  31. 

5.  Discounted  at  the  First  National  Bank  our  60-day  note  for  $2,000, 

receiving  credit  for  the  proceeds.  Sent  Allen  and  Company 
our  check  for  $2,000  to  apply  on  the  principal  of  the  mortgage 
we  owe  them. 

6.  Cash  sales  of  merchandise  for  the  week,  $13,460.20.     Enter  this 

in  the  sales  journal  and  then  in  the  cash  book.  Purchased 
merchandise  for  cash  from  sundry  dealers  $9,746.85. 

8.  Gave  Herbert  Murray  check  for  $308.65  in  full  payment  of  ac- 

count, $318.20,  less  3%  discount. 

9.  Sold  to  Amos  K.  McBride,  Pittsburgh,  Pa.,  one-half  on  30-day 

note,  one-half  on  account,  2/10,  n/30,  merchandise  of  $1,264. 
Mr.  Thatcher  withdrew  cash  for  personal  use  $50. 


PROMISSORY  NOTES  421 

10.     Paid  Chester  Pierce,  St.  Paul,  Minn.,  in  full  settlement  of  account 

by  giving  him  our  30-day  note  with  interest  for  $900,  and  cash 

for  the  balance  due  him,  less  2%. 
12.     Received  check  for  $866.70  from  Arthur  Hadley,  Atlanta,  Ga.,  in 

payment  of  his  note  for  $850  due  today  and  $16.70  interest. 

This  includes  $15  accrued  interest. 
14.     Purchased  from  Herbert  Murray,  Nashville,  Tenn.,  merchandise 

$3,000,  terms  cash  $500,  60-day  note  with  interest  $1,500,  on 

account,  2/10,  n/30,  $1,000. 

16.  Bought  for  cash  from  the  Dunham  Desk  Company  new  office 

desk  $125. 

17.  Paid  office  clerks'  and  bookkeepers'  salaries  in  cash  $200.     This 

includes  $50  for  your  services  as  bookkeeper. 
20.     Returned  to  Herbert  Murray  merchandise  billed  to  us  at  $150 
because  it  was  not  the  kind  ordered,  and  asked  them  to  send 
credit  memorandum. 

22.  Homer  Welbrun  sent  his  check  for  $752.50  in  payment  of  his  20- 

day  interest-bearing  note  of  the  2d  instant. 

23.  John  Drury  allowed  us  6%  discount  for  prepaying  our  4-months, 

non-interest-bearing  note  of  November  9,  19 — .  Face  of  note 
$1,200. 

24.  We  received  notice  of  protest  for  non-payment  from  the  First 

National  Bank,  stating  that  Craig  and  Drury,  Trenton,  N.  J., 
failed  to  honor  their  note  for  $200  and  that  they  demanded 
payment  for  the  note  and  $3  in  protest  fees  from  us,  as  we  were 
indorsers.  This  is  one  of  a  number  of  notes  we  discounted 
last  year.  We  gave  the  bank  our  check  to  cover  note  and  pro- 
test fees. 
27.  Paid  cash  for  office  supplies  $38.60;  advertising  $58.75.  Pur- 
chased merchandise  for  cash  from  sundry  dealers  $2,684.00. 

30.  Sold  merchandise  for  cash  to  sundry  customers  $6,976.73. 

3 1 .  Paid R.  R.  by  check  for  freight  on  merchandise 

$216.75.  Of  this  amount  $183.90  applies  to  purchases  and  the 
balance  to  sales.  Paid  telephone  and  telegraph  bills  in  cash 
$12.40.     Paid  salesmen's  salaries  in  cash  $225. 

(a)  Record  the  above  transactions  in  the  various  books  of  original 
entry. 

(b)  Write  the  summaries  and  rule  off  each  book. 

(c)  Post  and  take  a  trial  balance  and  record  it  on  pages  3  2  and  34  of  the 
journal  blank.     Enter  the  amounts  in  the  third  and  fourth  money  columns 


422  FUNDAMENTALS  OF  ACCOUNTING 

opposite  the  proper  account  titles.  Do  not  rewrite  account  titles.  Head 
the  third  and  fourth  columns,  "Jan.  31,  19 — ." 

Note:  In  handling  the  group  transaction  of  cash  sales  and  purchases 
post  the  sundry  sales  and  purchases  to  the  following  accounts;  Sundry 
Customers,  and  Sundry  Creditors. 

(This  problem  is  continued  in  Problem  15,  Chapter  XXVI.) 


CHAPTER  XXVI 
BANKS  AND   THEIR   FUNCTIONS 

Purpose  of  Chapter. — 

i .  Nature  and  function  of  banks. 

2.  Deposits  and  checks. 

3.  Reconciliation  of  bank  balance. 

4.  Various  check  operations. 

What  the  Bank  Is. — A  bank  is  a  business  institution  for  the 
safe-keeping,  loan,  exchange,  or  issue  of  money.  It  is  sometimes 
spoken  of  as  an  institution  for  credit.  What  is  meant  by  this  we 
shall  attempt  to  explain.  A  banker  organizes  his  business  by 
the  investment  of  a  cash  capital  in  much  the  same  way  that  every 
other  business  man  does.  The  most  obvious  function  of  a  bank 
is  the  safe-keeping  of  funds.  The  banker  has  in  his  possession  a 
great  deal  more  money  than  he  himself  put  into  his  business. 
Experience  shows  that  seldom,  if  ever,  are  all  of  the  moneys 
which  have  been  placed  with  a  banker  for  safe-keeping  called 
for  by  depositors  at  one  time.  Hence,  the  banker  knows  that 
he  will  have  available  large  sums  in  addition  to  his  own  invest- 
ment for  the  payment  of  checks  drawn  on  the  bank. 

The  amount  of  funds  which  the  banker  must  keep  on  hand  to 
meet  checks  drawn  against  his  bank  is  larger  in  some  countries 
than  in  others.  The  natural  characteristics  of  the  people,  and 
their  conservatism  in  doing  business  and  in  placing  trust  in  their 
bank  are  all  factors  which  the  banker  must  take  into  account. 
Naturally  he  cannot  be  expected  to  safeguard  the  funds  of  his  de- 
positors without  recompense.  This  recompense,  from  the  begin- 
ning of  banking,  has  usually  taken  the  form  of  allowing  the 
banker  to  lend  the  unused  funds  of  his  depositors.    A  banker 

423 


\2\  FUNDAMENTALS  OF  ACCOUNTING 

lending  money  does  not  usually  hand  the  money  over  to  the 
borrower  but  gives  him  the  right  to  draw  checks  on  the  bank  up 
to  the  amount  of  the  loan.  Money  will  be  paid  out  only  as 
these  checks  are  presented  to  the  bank  for  payment.  Thus,  the 
right  of  drawing  on  the  bank  is  called  an  "extension  of  credit" 
to  the  borrower. 

How  much  credit  can  be  extended  by  the  bank  to  its  borrowers 
will  depend  on  the  amount  of  money  in  the  bank,  this  money  be- 
longing both  to  the  bank's  depositors  and  to  the  bank  itself.  The 
bank  must,  of  course,  never  allow  itself  to  get  into  the  position 
where  it  will  not  have  sufficient  money  to  pay  all  checks  pre- 
sented to  it  for  payment.  However,  inasmuch  as  banking  ex- 
perience shows  that  all  depositors  never  want  all  of  their  funds 
at  the  same  time,  there  is  always  lying  in  the  bank,  moneys  which 
can  be  used  to  pay  the  checks  of  the  parties  to  whom  the  bank 
has  extended  credit.  In  this  way  a  bank  with  actual  money  on 
hand  of  $100,000  might  make  loans  to  borrowers  totaling  $200,000 
or  $300,000.  Granting  a  depositor  the  right  to  check  against 
the  bank  for  amounts  over  and  above  the  actual  amount  of  money 
that  the  depositor  may  have  in  the  bank  is  called  the  "  lending 
of  credit."  It  is  on  credit  that  the  country  does  most  of  its  busi- 
ness. Without  this  system,  many  times  the  present  amount  of 
money  would  be  needed . 

How  the  Bank  Is  Paid  for  its  Services. — It  was  stated  above 
that  the  bank  does  not  usually  make  any  charge  for  acting  as  a 
guardian  of  the  funds  of  depositors.  It  does,  however,  reserve 
the  right  to  use  these  funds  as  a  basis  for  extending  credit,  that 
is,  for  making  loans  to  business  men  and  others,  for  which  it 
makes  a  charge  under  the  head  of  "interest"  or  "discount." 
This  is  the  chief  source  of  income  of  the  bank  and  is  an  indirect 
charge  against  the  depositor  for  safeguarding  his  funds.  The 
student  will  appreciate  the  value  of  this  right  when  he  considers 
that  on  the  basis  of  $100,000  of  cash  deposited  with  the  bank, 
the  banker  may  make  loans  of  $200,000  or  $300,000  on  which  he 


BANKS  AXD  THEIR  FUNCTIONS  425 

m\\  receive  interest.  The  banker  usually  makes  a  charge  also 
for  the  collection  of  checks,  notes,  drafts,  etc.,  the  purchase  of 
stocks  and  bonds,  and  other  incidental  services. 

Kinds  of  Banks. — There  are  two  principal  kinds  of  banks: 
(1)  commercial  banks,  or  banks  of  discount,  and  (2)  savings 
banks. 

Under  commercial  banks  we  have : 

(a)  National  banks,  chartered  by  and  deriving  their  authority 
from  the  federal  government.  Such  banks  are  controlled  by 
and  are  subject  to  examination  by  the  federal  government. 

(b)  State  banks,  which  get  their  authority  from  the  state  in 
which  they  are  located. 

(c)  Trust  companies,  chartered  by  the  state,  and  originally 
organized  to  do  a  trust  business,  but  nearly  always  doing  a  certain 
amount  of  commercial  banking. 

(d)  A  super  bank,  a  bank's  bank,  known  as  the  "federal  re- 
serve banking  system."  The  country  is  divided  geographically 
into  12  districts  in  each  of  which  there  is  a  reserve  bank.  These 
banks  transact  business  only  with  the  banks  in  their  district  that 
are  members  of  the  reserve  banking  system.  National  banks, 
state  banks,  and  trust  companies  are,  or  may  become,  members  of 
the  federal  reserve  banking  system. 

Savings  banks  are  of  several  kinds : 

(a)  The  United  States  postal  savings  bank,  for  which  each 
postmaster  is  the  representative.  He  will  receive  moneys  for 
deposit  in  the  postal  savings  bank. 

(b)  Mutual  savings  banks,  which  are  operated  for  the  mutual 
benefit  of  all  depositors  and  in  a  sense  are  owned  by  them.  They 
are  conducted,  however,  by  a  self-appointed  board  of  trustees, 
which  does  not  own  the  bank  and  is  not  financially  liable  for  its 
debts. 

(c)  Stock  savings  banks,  which  are  stock  corporations  duly 
formed  and  owned  by  their  stockholders.  Such  a  bank  upon 
accepting  a  savings  deposit,  contracts  with  the  depositor  to  pay 


426  FUNDAMENTALS  OF  ACCOUNTING 

a  fixed  rate  of  interest  on  sums  left  on  deposit,  in  accordance 
with  definite  regulations.  All  income  beyond  the  amounts  due 
depositors  belongs  to  the  owners  of  the  bank.  In  the  mutual 
savings  bank  all  income  earned  above  a  certain  amount  re- 
served for  safety  must  be  distributed  pro  rata  among  the  de- 
positors. 

(d)  State  savings  banks,  which  are  similar  to  the  United 
States  postal  savings  bank,  in  that  they  are  owned  and  operated 
by  the  state. 

(e)  Savings  departments  of  commercial  banks,  which  pay  a 
fixed  rate  of  interest  to  depositors  but  are  in  no  sense  mutual 
savings  banks. 

Functions  of  Commercial  Banks. — The  commercial  bank 
performs  the  following  services  for  the  business  community : 

i.  It  provides  a  safe  and  convenient  place  for  the  deposit  of 
money. 

2.  It  enables  the  depositor  to  withdraw  money  by  means  of  a 
written  order  known  as  a  check. 

3.  The  check  may  be  used  not  only  for  personally  withdraw- 
ing money  but  also  for  transferring  money  to  someone  else.  The 
bank  holding  on  deposit  the  funds  of  a  business  man  will  at  his 
order  pay  or  transfer  the  money  to  the  party  he  names.  In  this 
way  the  risk  and  inconvenience  of  handling  money  is  reduced, 
because  the  check  will  not  be  cashed  by  the  bank  without  proper 
indorsement.  The  check  when  paid  is  canceled,  that  is,  marked 
"Paid,"  and  returned  to  the  depositor  issuing  it,  serving  as  good 
evidence  that  the  sum  has  been  paid. 

4.  One  of  the  chief  functions  is  lending  money.  This  is  done 
usually  on  the  basis  of  a  promissory  note  drawn  in  favor  of  the 
bank  by  the  borrower.  To  protect  itself  the  bank  may  demand 
that  another  party  indorse  the  note,  guaranteeing  its  payment 
in  case  the  borrower  fails  to  pay  it.  This  is  known  as  "double" 
or  "  two-name  "  paper  in  that  there  are  two  parties  to  whom  the 
bank  may  look  for  payment.     Such  a  note  from  the  banker's 


BANKS  AND  THEIR  FUNCTIONS  427 

standpoint  is  a  better  note  as  to  security  than  one  signed  only 
by  the  borrower  and  known  as  "one-name"  paper.  Instead  of 
an  additional  indorser,  the  banker  may  require  the  deposit  of 
collateral  security,  such  as  certificates  of  stock  or  bonds  that  have 
a  ready  marketable  value.  These  are  turned  over  to  the  banker 
under  a  contract  which  gives  him  the  right  to  sell  them  and  apply 
as  much  of  the  proceeds  as  are  necessary  to  the  payment  of  the 
note  if  it  is  not  paid  by  the  borrower  when  due.  A  commercial 
bank  may  not  usually  lend  money  on  real  estate. 

5.  A  bank  may  discount  or  buy  negotiable  instruments,  such 
as  promissory  notes,  drafts,  bills  of  exchange,  trade  acceptances, 
etc. 

6.  All  banks  undertake  for  their  customers  the  collection  of 
negotiable  instruments,  or  commercial  paper,  including  promis- 
sory notes,  drafts,  interest  coupons  on  bonds,  dividend  checks, 
other  checks,  and  the  like.  A  charge  is  often  made  for  these 
services. 

7.  The  bank  provides  a  convenient  way  to  pay  debts  at  a  dis- 
tance without  the  actual  transfer  of  the  debtor's  funds,  by  issuing 
its  own  checks,  known  as  "bank  drafts"  or  "cashier's  checks," 
by  lending  credit,  and  by  certifying  its  depositor's  checks. 

8.  The  commercial  bank  will  accept  funds  on  deposit  not  sub- 
ject to  check  for  which  it  issues  certificates  of  deposit.  Generally, 
though  not  always,  this  certificate  will  bear  interest.  Interest  is 
not  usually  allowed  on  a  small  checking  account.  Hence,  to 
receive  interest,  a  small  depositor  must  ordinarily  deposit  his  funds 
under  the  certificate  of  deposit  plan  and  give  up  the  privilege  of 
checking  against  this  special  deposit. 

9.  National  banks  and  federal  reserve  banks  have  the  right 
to  issue  paper  money.  This  money  is  in  the  nature  of  a  promis- 
sory note  given  by  the  bank,  payable  on  demand.  These  notes 
are  known  as  "national  bank"  notes  and  "federal  reserve  bank" 

notes. 

10.  All  trust  companies,  national  banks  to  a  large  extent,  and 
state  banks  in  some  cases,  exercise  trust  powers,  i.e.,  act  as 


428  FUNDAMENTALS  OF  ACCOUNTING 

trustees  in  decedents'  estates,  in  bankruptcies,  and  as  executors 
of  wills,  guardians  of  minors,  registrars  of  stocks  and  bonds,  and 
in  practically  all  other  cases  where  an  individual  might  act  as 
a  trustee. 

Functions  of  Savings  Banks. — The  handling  of  money  by 
savings  banks  is  limited  by  law  to  the  following  functions: 

i.  It  may  receive  funds  on  deposit  and  pay  to  depositors  a 
small  rate  of  interest  or  such  rate  as  it  may  earn,  thus  encouraging 
savings  in  small  amounts,  since  an  account  of  almost  any  size  is 
subject  to  interest.  By  combining  many  small  amounts  from  a 
great  number  of  people,  large  funds  are  provided.  Money  which 
would  otherwise  be  tied  up  in  presumably  safe  places  and  so  kept 
out  of  circulation  is  thus  thrown  into  the  regular  channels  of 
trade. 

2.  The  savings  bank  may  permit  the  depositor  to  withdraw 
his  funds  on  demand,  or  it  may  require  a  few  days'  notice  of 
intention  to  withdraw. 

3.  The  lending  of  money  by  the  savings  bank  is  restricted  by 
law  to  definite  conditions.  It  may  lend  money  on  mortgage 
loans  or  real  estate  security;  it  may  invest  in  the  bonds  of  muni- 
cipalities, public  service  companies,  and  manufacturing  enter- 
prises to  a  limited  extent.  Inasmuch  as  there  is  not  a  uniform 
savings  bank  law,  each  state's  laws  must  be  examined  before  the 
exact  requirements  as  to  loans  and  investments  of  a  savings  bank 
can  be  determined.  Usually,  however,  investment  is  limited 
to  government,  state,  city,  county,  and  school  district  bonds, 
bonds  of  railroads,  street  railway  companies,  light  and  power 
companies.  In  some  cases  investment  in  the  bonds  of  high- 
grade  manufacturing  enterprises  and  in  the  stock  of  banks  is 
permitted. 

Opening  an  Account  with  a  Commercial  Bank. — In  dealing 
with  a  commercial  bank  the  first  step  is  for  the  prospective  de- 
positor to  introduce  himself  to  the  manager  of  the  bank  or  to  be 


BANKS  AND  THEIR  FUNCTIONS  429 

introduced  by  one  of  the  bank's  depositors.  If  the  introduction 
is  satisfactory  and  the  banker  desires  the  party  to  become  a  de- 
positor, the  arrangement  is  made  to  accept  whatever  moneys  the 
depositor  places  with  the  bank,  subject  to  withdrawal  on  his 
order  or  check.  Most  banks  require  a  minimum  amount  to  be 
kept  on  deposit  at  all  times.  The  expense  incurred  by  the  bank 
in  safe-keeping  its  depositors'  funds,  in  handling  their  checks, 
and  in  rendering  miscellaneous  services  is  not  inconsiderable. 
To  recompense  itself  the  bank  must  be  assured  that  a  certain 
amount  will  be  kept  constantly  on  deposit  to  serve  as  a  basis  for 
loans  and  discounts.  Before  the  bank  will  allow  a  depositor  to 
draw  checks,  it  must  have  one  or  several  of  the  signatures  which 
the  depositor  intends  to  use  on  his  checks.  Since  the  bank  agrees 
not  to  pay  out  any  money  except  on  the  order  of  the  depositor, 
it  must  pass  on  the  genuineness  of  the  signature  of  every  check 
drawn  by  him.  This  copy  of  the  depositor's  authorized  signature 
is  made  on  the  signature  card.  These  cards  are  then  placed  in 
files  for  ready  reference  by  the  employees  of  the  bank  whenever 
checks  are  presented  for  payment.  Having  supplied  his  official 
signature,  the  depositor  receives  from  the  bank  a  pass-book  and 
two  kinds  of  blanks:  One,  known  as  the  deposit  ticket,  is  used 
whenever  he  deposits  money;  the  other,  known  as  the  check,  is 
used  for  the  withdrawal  of  money. 

The  Deposit  Ticket. — The  deposit  ticket  (Form  27)  is  used 
for  the  purpose  of  listing  the  various  kinds  of  money  deposited  at 
a  given  time.  Provision  is  made  for  listing  gold,  silver,  bills,  and 
checks.  The  gold  and  silver  coins  should  be  kept  separate.  The 
bills  should  be  arranged  in  packages  according  to  their  denomina- 
tion, $1  bills  in  one  package,  $5  bills  in  another,  etc.,  and  in  the 
same  order,  that  is,  face  up,  and  all  lying  one  way.  Checks  are 
to  be  listed  separately.  Make  sure  that  they  are  properly 
indorsed. 

In  preparing  the  deposit  ticket  omit  all  $  signs  and  be  careful 
to  place  the  figures  underneath  one  another  so  as  to  make  addi- 


43° 


FUNDAMENTALS  OF  ACCOUNTING 


Deposited  to  the  Account  of 


L^nr-th^ 
Fifth  Avenue   Office 


Guaranty  Trust  Comp< 

NewYork. 


T  of  Ne\vYbrk 

^.    /Z     193./ 


Please  enter  each  ctxecHr  separately 


Coin 

Bills 

Checks        /  —  X  & 


S3-   / 


SQ-1/.cf^ 


Dollars 


Cents 


3ZZ 


y-<£" 


\£n_ 


/  <°Z-  <?o 


rs[?r 


fr.^.^'KjL 


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i^r_ 


tion  easy.  The 
deposit  ticket  is 
an  important 
document,  as  it 
constitutes  the  or- 
iginal entry  of  the 
deposit.  Many 
business  men  take 
the  precaution  to 
keep  a  carbon 
copy  of  every 
ticket. 

The  banker 
accepts  any  of  the 
legal  moneys  of 
the  country,  such 
as  gold,  silver, 
nickel,  copper, 
and  the  various 
kinds  of  paper 
money.  He  ac- 
cepts also  checks 
on  other  banks 
or  on  his  own 
bank,  on  the  con- 
dition that  they 
can  be  collected. 
In  case  a  deposit- 
ed check  proves  uncollectible,  its  amount  is  charged  back  against 
the  depositor's  account  and  the  check  returned  to  him. 

The  Bank  Pass-Book. — Having  made  out  his  deposit  ticket 
and  arranged  his  deposit  in  the  same  order  in  which  it  appears  on 
the  ticket,  the  depositor  takes  both  to  the  receiving  teller  who 
verifies  the  deposit  item  by  item,  and  also  the  total  amount.     If 


JLZ 


44-Q 


Safe    Deposit   Vault 


33 


7-L 


Form  27.     Deposit  Ticket 


BANKS  AND  THEIR  FUNCTIONS  43 1 

found  correct,  the  amount  is  entered  in  the  depositor's  bank  pass- 
book which  should  be  presented  by  him  at  the  time  each  deposit 
is  made.  In  the  absence  of  the  pass-book  a  duplicate  deposit 
ticket  may  be  presented  for  the  receiving  teller's  signature.  The 
pass-book  is  a  small  bound  memorandum  book  with  a  date 
column  at  the  left,  a  wider  explanation  column,  and  a  single 
money  column.  Entries  in  the  deposit  book  are  always  made  by 
the  bank  teller,  never  by  the  depositor.  This  pass-book  is  a 
memorandum  receipt  for  moneys  turned  over  to  the  bank  and 
may  also  be  used  for  the  periodic  statement  of  the  condition  of 
the  depositor's  account. 

The  Bank  Check. — The  depositor  is  now  in  a  position  to  draw 
checks  against  this  deposit  for  the  settlement  of  debts  or  for 
other  purposes.  In  the  sight  of  the  law  the  check  is  a  negotiable 
instrument.  Its  fundamental  legal  characteristics  are  those  of  a 
negotiable  instrument,  being  a  written  order  on  a  bank,  demand- 
ing payment  of  a  definite  sum  of  money,  the  order  being  signed 
by  the  maker  of  the  check .  B  y  ref  eren  ce  to  Forms  2  8  (a) ,  (b) ,  and 
(c)  the  essential  and  the  non-essential  parts  of  the  check  may  be 
noted.    The  essential  items  are: 

1 .  The  date. 

2.  The  name  of  the  bank  on  which  drawn. 

3.  The  definite  order  or  demand  evidenced  by  the  phrases: 

(a)  "Pay  to  the  order  of." 

(b)  "Pay  to  Bearer." 

4.  The  statement  in  both  words  and  figures  of  the  sum  of 

money  involved. 

5.  The  signature  of  the  maker  of  the  check,  that  is,  the 

depositor. 
The  non-essential  items  are:  (1)  the  check  number,  and  (2) 
the  purpose  for  which  the  check  is  given.  Although  not  essential, 
these  are  very  convenient,  especially  the  check  number  which 
facilitates  the  proof  of  the  correctness  of  the  depositor's  bank 
balance,  as  explained  later. 


432  FUNDAMENTALS  OF  ACCOUNTING 

The  parties  to  a  check  are: 
i.  The  drawer,  or  maker. 

2.  The  payee,  to  whom  the  check  is  made  payable. 

3.  The  drawee,  i.e.,  the  bank  on  which  it  is  drawn. 

A   check   is   often   made  payable   to    "Cash,"  "Myself," 
"Bearer,"  "New  York  Draft,"  "Pay-Roil,"  etc.     This  indicates 
that  the  check  is  payable  to  a  bearer  personally  known  to  the 
paying  teller.     A  check  made  payable  to  "New  York  Draft," 
"Pay-Roil,"  etc.,  indicates  the  purpose  for  which  it  is  drawn. 

The  check  as  compared  with  the  promissory  note  has  these 
points  of  similarity  and  difference: 

1.  They  are  the  same  in  that  they  are  both  negotiable 
instruments. 

2.  They  are  the  same  in  that  each  is  transferred  by  indorse- 
ment. 

3.  They  differ  in  that  the  note  is  a  promise  to  pay,  however, 
while  the  check  is  an  order  or  request  to  pay. 

4.  They  differ  in  that  the  check  is  a  demand  order  and  is 
therefore  looked  upon  as  cash,  while  the  promissory  note  is 
usually  payable  at  a  future  time  rather  than  on  demand. 

Form  of  Check. — Three  standard  forms  of  check  are  shown  in 
Forms  28(a),  (b),  and  (c).     Their  chief  difference  is  in  the  ar- 


PAYABLE  THROUGM^EW  Y0fTn  CLCA^NG  MrUSL  -^ 


Form  28.     (a)  Check  Payable  to  "  Cash  " 

rangement  of  the  material  on  the  face  of  the  check.     In  drawing 
checks  it  is  always  best  first  to  make  the  memorandum  contain- 


BANKS  AND  THEIR  FUNCTIONS  433 

ing  the  essential  information  on  the  stub  or  interleaf.  The  next 
steps  are  to  date  the  check;  write  the  name  of  the  payee;  and  then 
write  the  amount  beginning  well  to  the  left.     Use  plenty  of  ink. 


Alliance  Shipping  company,  inc. 


Ja£u*^£A*4dtaa^jL  '^ZrJ'Ss^-^J 


alliance  Shipping  Company, 


To  GUARANTY  TRUST  COMPANY  Alliance  Shipping  Company,  inc 

OF  NEW  YORK 


Form  28.     (b)   Draft  Form  of  Check 

Leave  no  spaces  between  words.  Fill  all  blank  spaces  with  a 
wavy  line.  Write  figures  close  up  to  the  $  sign,  and  made  sure 
that  they  are  legible.  Usually  a  simple  plain  signature  is  harder 
to  forge  than  an  illegible  one  with  many  flourishes  and  contortions. 


r^^^^Xy—^Ze^o    <?j>^t^&    P-rt^i* — 


%e^*jLy  /?fu*JiJL^i+~yL/ 


Form  28.     (c)   Check  for  Less  than  One  Dollar 

When  writing  a  check  for  less  than  $1  (see  Form  28c),  in  filling  in 
the  written  amount,  follow  it  with  the  words  "Cents  Only,"  for 
example,  "Sixty-nine  Cents  Only,"  and  cross  out  the  printed  word 
"Dollars."     After  the  amount  in  figures  one  may  also  write  the 

word  "Only,"  for  example,  "-^_  only."     This  aids  the  paying 
J  100 

teller  when  the  check  is  presented  for  payment. 


434  FUNDAMENTALS  OF  ACCOUNTING 

Check  Indorsements. — For  purposes  of  transfer  and  before 
presentation  to  the  bank  for  payment,  checks  must  be  properly 
indorsed.  The  various  forms  of  indorsement  explained  in  Chap- 
ter XXV  on  promissory  notes  are  also  used  for  checks.  The  full 
indorsement  is  preferable  in  all  cases.  This  is  shown  in  Form 
21(a).  Checks  made  payable  to  "Cash,"  when  presented  by 
the  maker,  do  not  ordinarily  have  to  be  indorsed;  those  made 
payable  to  "Myself/'  "Bearer,"  or  "Pay-Roll,"  if  the  cash  is  to 
be  passed  over  the  counter  to  the  maker  of  the  check  or  to  an- 
other party,  must  usually  be  indorsed  by  the  receiving  party.  A 
check  made  payable  to  a  special  pay-roll  account  in  the  bank,  to 
be  disbursed  by  it,  and  checks  made  payable  to  "New  York 
Draft,"  etc. — in  other  words,  checks  so  drawn  that  the  bank 
itself  is  to  get  the  funds  and  is  not  to  pass  them  over  the  counter 
to  the  one  presenting  the  check — do  not  ordinarily  require 
indorsement. 

The  protection  of  checks  from  alteration  is  a  serious  problem 
in  these  days  when  expert  crooks  by  the  use  of  bleaching  acid 
and  other  tools  and  devices  of  the  art  of  alterations  have  made 
the  detection  of  erasures  and  alterations  almost  impossible. 
Various  devices  are  used  to  protect  against  fraud,  as  where  the 
amount  of  the  check  is  cut  into  or  perforated  through  the  paper 
and  the  cut  edges  inked  with  indelible  ink;  the  use  of  printed 
marginal  maximum  amounts  so  that  the  check  will  not  be  good 
for  more  than  the  indicated  maximum;  the  use  of  special  water- 
marked paper;  the  use  of  forge-proof  ink.  These  have  all  been 
helpful,  but  are  not  wholly  successful.  The  bank  is  liable  if  it 
makes  payment  on  a  check  with  a  forged  signature.  In  the 
case  of  alteration  of  other  portions  of  the  check,  as  for  example, 
raising  the  amount,  the  maker  suffers  the  loss.  Writing  the 
check  in  accordance  with  the  directions  given  above  prevents 
many  of  the  simpler  and  more  apparent  alterations.  How- 
ever, even  the  best  protected  checks  are  often  changed  by  a 
clever  crook,  in  such  a  way  as  to  escape  detection  by  the  watchful 
eye  of  the  bank  clerk. 


BANKS  AND  THEIR  FUNCTIONS  435 

Recording  Dealings  with  the  Bank. — A  record  must  be  kept 
of  dealings  with  the  bank,  just  as  with  each  customer  and  credi- 
tor. The  bank  is  charged  with  moneys  deposited  and  credited 
with  checks  drawn.  The  manner  of  recording  these  charges  and 
credits  varies.  In  most  cases,  however,  the  check  book  is  used 
for  this  purpose.  There  are  many  forms  of  check  books,  one  type 
being  shown  in  Form  3 1 . 

Check  books  are  printed  with  either  several  checks  or  only  one 
check  to  the  page.  Where  a  stub  is  not  provided,  an  interleaf  be- 
tween checks  is  used  to  record  the  essential  memoranda  concerning 
the  check.  Form  31  shows  a  check  book  with  stubs  having  one 
side  for  memoranda  of  checks  drawn  and  the  other  for  memoranda 
of  deposits  made.  After  the  memorandum  lias  been  made  out 
on  the  stub  or  interleaf,  the  check  itself  is  written.  The  number 
on  the  stub  or  interleaf  agrees  with  the  number  on  the  check. 
Filling  out  the  stub  or  interleaf  first  prevents  many  errors  that 
might  be  made  were  the  check  written  first,  and  also  prevents 
the  spoiling  of  checks.  Although  the  depositor  has  a  pass-book 
with  a  record  of  deposits  made,  this  shows  only  the  total  of  each 
deposit.  It  is  customary  to  keep  a  detailed  record  of  deposits 
in  the  check  book  also,  using  the  reverse  side  of  the  stub  or  inter- 
leaf. For  each  check  deposited,  the  maker,  the  date  the  check 
was  received,  its  transit  number,1  and  the  amount  should  be 
entered.  The  total  of  the  deposits  is  carried  forward  from  re- 
verse page  to  reverse  page,  just  as  the  amount  of  checks  drawn  on 
the  face  of  the  stub  or  interleaf  is  carried  forward.  The  amount 
available  for  checking  can  be  found  by  subtracting  total  checks 
from  total  deposits.  This  method  of  keeping  the  bank  account, 
barring  errors  made  in  recording,  should  always  prevent  over- 
drafts, that  is,  the  issuing  of  checks  for  an  amount  greater  than 
funds  available  in  the  bank. 


1  The  transit  number  of  a  check  indicates  the  bank  on  which  the  check  was  drawn.  Every 
bank  in  the  country  is  given  a  transit  number  by  which  its  checks  as  they  pass  from  hand  to 
hand  may  be  kept  track  of,  thus  saving  the  necessity  of  writing  its  name  in  full.  For  this 
purpose  the  country  is  districted,  and  each  bank  given  its  district  number  as  well  as  its  own 
number  within  that  district.  Thus,  the  number  1-45  applies  to  the  Corn  Exchange  Bank 
of  New  York  (1)  representing  the  district  number  and  (45)  the  bank  s  number  within  that 
district.     Where  a  transit  number  is  not  given,  the  name  of  the  bank  should  be  recorded 


436 


FUNDAMENTALS  OF  ACCOUNTING 


Balancing  the  Bank  Account. — To  confirm  his  record  of  his 
bank  account,  the  depositor  should  have  a  periodic  statement 
from  the  bank  showing  its  record  of  his  account.  In  the  bank's 
record  the  depositor  is  credited  with  all  sums  deposited  and 
charged  with  all  checks  paid.  When  the  bank  pays  a  check  for 
the  depositor,  it  is  marked  " Canceled"  or  "Paid,"  the  date  of 
payment  being  shown.  Thus,  canceled  checks  show  what  items 
have  been  paid  for  the  depositor's  account.  When  the  bank  ren< 
ders  its  statement,  the  canceled  checks  are  returned  as  evidence 
for  the  charges  which  the  bank  has  made  against  the  account. 

Two  methods  are  used  by  the  bank  in  rendering  the  periodic 
statement.  In  the  first  case  the  depositor's  pass-book  showing 
his  deposits  composes  the  credit  side  of  his  account.  These 
credit  entries  are  totaled  and  from  the  total  is  subtracted  on  the 
face  of  the  pass-book  page  the  total  of  the  canceled  checks  re- 
turned. An  adding  machine  list  of  the  checks  is  often  included 
wrapped  around  the  bunch  of  checks.  The  difference  between 
the  total  of  the  deposits  and  the  total  of  the  checks  is  shown  as 
the  new  balance.     A  balanced  pass-book  is  shown  in  Form  29. 


2/1 

2/5 

J  K 

$    375-20 

J  B 

759-35 

2/17 
2/25 
2/28/21 

J  B 

126.75 

J  B 

237.80 

Total  Credits 

$  1,499.10 

Less 

Vouchers  Ret'd  per  list 

867.90 

2/28/21 

Balance 

$     631.20 

Form  29.     Pass-Book  Balanced 


BANKS  AND  THEIR  FUNCTION'S 


437 


The  item,  Vouchers  Returned,  represents  the  canceled  checks 
which  total  $867.90,  leaving  a  balance  to  the  depositor's  credit  of 
$631.20. 

The  second  method  is  for  the  bank  to  render  a  formal  state- 
ment of  account,  no  use  being  made  of  the  pass-book  except  as  a 


Adair,  Sclth  1  Co. 
500  Broad  St.,  N.Y.C. 

IN  ACCOUNT  WITH 

IRVING  NATIONAL  BANK 

WOOLWORTH  BUILDING,   NEW  YORK 
M  at  once      If  no  error  »  reported  m  10  Aayi,  aecounr  *>!l  be  considered  < 


CHECKS 

rcB     1 

8.75 

rce     s 

5000 

FCB      s 

IIOjOO 

rtei  o 

4  464J.  4 

reel  s 

676XJ0 

rest  s 

2500j68 

reel  s 

8.08 

ra>t  a 

140.00 

Babacc  Brought  Forward 

rep     i  3  2  3712  0 

res     1  2  2  8  6  .7  4 


Form  30.     Bank  Statement  of  Account 


438  FUNDAMENTALS  OP  ACCOUNTING 

memorandum  receipt  for  the  deposits  made,  it  never  being  totaled 
or  balanced.  The  statement  shown  in  Form  30  is  a  transcript 
of  the  bank's  account  with  the  depositor  showing  all  credit  and 
debit  items.  Many  banks  render  such  a  statement  to  the 
depositor  monthly. 

Reconciliation  of  Depositor's  and  Bank's  Accounts.— When 
the  bank's  statement  of  account  or  the  balance  as  shown  by  the 
pass-book  is  received,  it  will  seldom  agree  with  the  depositor's 
record  for  several  reasons.  So  far  as  checks  drawn  are  concerned, 
the  depositor's  record  is  more  up  to  date  than  the  bank's  record. 
As  soon  as  a  check  is  written,  it  is  entered  on  the  stub  of  the  check 
book.  The  bank,  however,  knows  nothing  of  the  checks  drawn 
until  they  are  presented  for  payment.  Some  checks  are  sent  out 
of  town,  and  others  go  through  the  local  mail,  not  reaching  the 
bank  until  the  following  day  or  often  several  days  later.  These 
outstanding  checks  cause  the  chief  difference  between  the  bank's 
record  of  the  depositor's  account  and  his  own  record. 

Other  transactions,  however,  also  cause  differences.  If  the 
depositor  holds  a  customer's  note  due  in  a  few  days  and  places  it 
with  his  banker  for  collection,  the  banker  will  not  credit  his  ac- 
count with  the  amount  until  it  has  actually  been  collected.  Nor 
would  the  depositor  charge  the  banker  until  he  receives  notice 
that  the  amount  has  been  collected  and  placed  to  his  credit.  If 
the  bank's  statement  should  include  this  item  and  the  depositor's 
statement  not  include  it,  manifestly  there  would  be  a  difference 
between  the  two  accounts.  Again,  it  may  happen  that  cus- 
tomer's checks  deposited  and  accepted  for  credit  to  the  depositor's 
account  cannot  be  collected  by  the  bank.  The  amount  of  the 
uncollected  check  is  then  charged  back  against  the  depositor's 
account.  If  the  banker's  statement  takes  account  of  this  uncol- 
lectible check,  while  the  depositor  has  not  yet  been  notified  of  the 
failure  to  collect  the  item,  there  will  evidently  be  a  discrepancy 
between  the  two  records.  The  depositor  will,  of  course,  take  the 
matter  up  with  the  customer  and  attempt  to  collect  the  item. 


BANKS  AND  THEIR  FUNCTIONS  439 

Sometimes  the  banker  allows  interest  on  moneys  deposited, 
and  sometimes  collection  charges  are  made  on  checks  and  notes 
placed  with  the  bank  for  collection.  The  banker,  of  course, 
knows  both  the  interest  which  he  will  credit  and  the  exchange  or 
collection  costs  which  he  will  charge  to  the  depositor's  account, 
whereas  the  depositor  does  not  know  them  until  notified  by  the 
bank.  Thus  a  discrepancy  will  arise.  These  are  the  chief  items 
that  will  give  rise  to  a  difference  between  the  two  accounts. 

In  checking  one  account  against  the  other,  the  depositor  must 
take  all  such  items  into  consideration  and  make  a  reconciliation  of 
the  two  accounts.  For  the  purpose  of  safeguarding  cash,  it  is  best 
that  the  reconciliation  be  made  by  someone  who  does  not  draw 
the  checks  or  make  the  deposits.  This  should  prevent  fraud  ex- 
cept in  case  of  collusion.  The  first  thing  to  be  done  is  to  compare 
the  deposit  items  shown  by  the  pass-book  or  the  monthly  state- 
ment of  account  with  the  deposit  items  on  the  reverse  stub  of  the 
check  book.  Items  in  one  account  which  are  not  in  the  other  will 
account  for  a  difference  to  that  extent.  Next,  the  canceled 
checks  which  the  bank  has  returned  should  be  arranged  in  numeri- 
cal sequence  and  compared  with  the  stubs  in  the  check  book. 
Frequently  each  stub  corresponding  with  a  canceled  check  is 
marked  with  a  large  red  or  blue  check  mark.  Those  checks  which 
the  depositor  has  drawn  but  which  have  not  yet  been  presented 
to  the  bank  for  payment  will  in  this  way  become  apparent.  A 
list  of  these  showing  the  check  numbers  and  amounts  should  be 
made.     A  reconciliation  of  the  two  accounts  may  now  be  made. 

Two  methods  are  used.  Under  the  one,  the  balance  as  shown 
by  the  bank  is  reconciled  with  the  balance  as  shown,  by  the  de- 
positor's record,  that  is,  starting  with  the  bank  balance  we  adjust 
it  to  arrive  at  the  depositor's  balance.  Under  the  other,  we  start 
with  the  depositor's  balance  and  bring  it  into  agreement  with  the 
bank's  balance. 

In  the  illustration  following  the  first  method  is  used.  If  the 
bank's  balance  includes  a  credit  to  the  depositor's  account  of 
which  he  has  not  yet  received  notice,  the  bank's  balance  will  be 


440 


FUNDAMENTALS  OF  ACCOUNTING 


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BANKS  AND  THEIR  FUNCTIONS  441 

larger  by  that  amount  than  the  depositor's  record.  Hence,  the 
amount  of  such  credit  items — notes  collected,  interest  credited, 
etc. — must  be  subtracted  from  the  bank's  balance.  If  there  are 
any  outstanding  checks,  manifestly,  the  bank's  balance  will  be 
larger  by  the  amount  of  these  checks  than  that  shown  by  the 
depositor's  record.  It  is  necessary,  therefore,  to  subtract  from 
the  bank's  balance  the  amount  of  the  outstanding  checks  in  order 
to  arrive  at  the  balance  as  shown  by  the  depositor's  record. 
When  these  adjustments  have  been  made  the  two  accounts 
should  agree.  An  illustration  will  make  most  of  these  points 
clear. 

Example.  John  Doe's  balance  as  shown  by  his  bank  is  $631.20  as  of 
February  28.  A  comparison  of  the  depositor's  record  of  deposits  and  the 
bank's  record  of  deposits  shows  that  the  bank  has  credited  to  the  de- 
positor's account  the  following  items  for  which  the  depositor  has  not  yet 
received  notice:  A's  note  collected  $375,  and  interest  credited  for  the 
month  of  February  $3.40.  A  comparison  of  the  canceled  checks  with 
those  which  have  been  drawn,  as  shown  by  the  depositor's  check  book  stubs, 
shows  that  the  following  checks  are  outstanding:  #496,  $100.25;  #501, 
$10.50;  #505,  $6.75.  The  depositees  record  shows  that  he  has  a  balance 
in  the  bank  of  $135.30.     Reconcile  the  two  accounts. 

Reconciliation  Statement  of  Bank  Account 

February  28   19 — 

Bank  balance  per  pass-book  (or  statement) $631.20 

Deduct; 

A's  note  collected  but  not  yet  entered  in  cash  book         $375" 
Interest  for  February  credited  by  bank  but  not  yet 

entered  in  cash  book 3-P      378-4© 

$252.80 

Deduct:  Outstanding  checks 

Ck.  #406  $100.25 

#501 TO-5° 

#505 J^Jl        II75° 

Cash  book  balance $i35-3« 


442  FUNDAMENTALS  OF  ACCOUNTING 

The  student  will  understand,  of  course,  that  neither  the 
bank's  balance  nor  the  depositor's  balance  will  necessarily 
be  the  correct  one.  In  the  case  above  the  bank  has  credited 
the  depositor  with  a  deposit  which  had  not  been  recorded  in 
the  depositor's  books.  On  the  other  hand,  the  depositor  has 
a  record  of  checks  drawn  against  his  deposit  of  which  the 
bank  has  no  knowledge.  The  purpose  of  the  reconciliation 
statement  is  not  necessarily  to  show  the  true  balance  available 
for  checking,  but  primarily  to  check  the  correctness  of  both 
records.  Two  independent  records  of  the  same  account — in  this 
case  one  kept  by  the  bank  and  the  other  by  the  depositor — pro- 
vide the  best  proof  of  accuracy  it  is  possible  to  secure.  The 
reconciliation  statement  serves  this  purpose.  If  the  depositor 
desires  to  know  the  true  balance  available  for  checking,  he  will 
take  account  of  the  deposits  with  which  the  bank  credits  him  but 
which  he  has  not  yet  recorded  on  his  own  books.  His  own 
records  will  then  show  the  true  status  of  his  bank  account. 

In  the  example  shown  above,  the  true  balance  available  for 
checking  is  $513.70,  made  up  as  follows: 

Balance  as  shown  by  depositor's  re.cord $135.30 

Add:  Items  credited  by  bank  but  not  yet  taken  into 
the  depositor's  record: 

A's  note  collected $375— 

Interest  for  February 3.40       378.40 

True  balance  available  for  checking $513.70 


Certification  of  Checks. — Certified  checks  are  required  for 
some  business  transactions  and  are  desirable  for  many  others.  A 
certified  check  is  one  on  the  face  of  which  is  the  bank's  certificate 
that  the  check  is  good.  The  bank's  statement  that  the  check  is 
good  carries  greater  weight  than  does  the  individual's  because  the 
bank  is  a  better  known  institution.  Any  check  may  be  certified 
by  presenting  it  to  the  bank  in  which  the  funds  drawn  on  are 
deposited  and  having  the  bank's  statement  written  or  stamped 


BANKS  AND  THEIR   FUNCTIONS 


443 
A  form 


across  its  face  that  the  check  is  good  or  that  it  is  accepted 
of  certified  check  is  shown  in  Form  32. 

The  legal  effect  of  certification  or  acceptance  of  a  check  by 
the  bank  is  that  it  and  not  the  depositor  now  becomes  liable  for 


No 1285- 

T«?f|JQU 


Paytothe 

ORDER  OF 


Ten  and 


EW York,    August  8th  1921       tar> 

iQgMPANYOFNEWYORK  ■-*» 

.Branch  ...  .-o.o— . 

$  10.  op_ 


Form  32.     Certified  Check 

the  payment  of  the  check.  To  carry  this  liability  into  effect  the 
depositor's  account  is  charged  as  soon  as  the  check  is  certified 
and  the  amount  of  the  check  is  transferred  to  the  general  funds 
of  the  bank.  When  the  check  is  presented  for  payment  the 
bank's  funds  and  not  the  depositor's  will  be  used  to  meet  it. 

Either  the  holder  or  the  maker  of  a  check  may  present  it  for 
certification.  A  holder  may  desire  to  have  a  check  certified, 
because  he  does  not  care  to  collect  payment  from  the  bank  im- 
mediately or  because  he  wishes  to  send  the  check  through  the 
mails  to  another  party.  When  the  holder  has  a  check  certified, 
the  maker  is  absolutely  released  from  all  liability  for  payment. 

The  maker  may  desire  to  have  his  check  certified  before  send- 
ing it  to  a  creditor  in  order  to  make  the  funds  immediately  avail- 
able for  the  creditor  instead  of  compelling  him  to  wait  until  the 
check  can  be  collected  by  his  bank.  It  is  customary  to  deposit 
certified  checks  as  evidence  of  good  faith  when  bidding  on  a  con- 
tract. If  the  drawer  of  a  check  has  it  certified  he  is  not  entirely 
freed  from  all  liability  inasmuch  as  the  courts  have  held  that  he 
is  still  liable  in  case  the  bank  fails  before  the  check  is  presented 
for  payment. 


444 


FUNDAMENTALS  OF  ACCOUNTING 


Cashier's  Checks. — A  cashier's  check  (Form  33)  is  a  check 
on  the  bank  signed  by  its  cashier.     In  effect  it  is  the  bank's 


s 


I  \WYnB,  AUG  1 1 1921      lfl2  xo.  137918 

IRVING  NATIONAL  BANK     <3>     W 


Form  33.     Cashier's  Check 

promise  to  pay  on  demand.  It  is  current  because  of  the  bank's 
standing  in  business  circles.  It  is  generally  used  by  the  bank  for 
making  payment  to  those  who  are  not  depositors. 

Certificate  of  Deposit. — A  certificate  of  deposit  (Form  34)  is  a 
statement  generally  signed  by  an  officer  of  the  bank,  certifying 
that  the  named  party  has  deposited  money  to  the  stated  amount. 


(Vrtifif-ate  of  Deposit 

Guaranty  Trust  Company  of  New  York 


.v,  176B 


W/-'S/'".H 


/fit  mk.  ff  '/''.ifrtf/'/i/,.-:  />'),  /iff///,//  ,i/.y't///rjv;,/  ,,'  A 


Form  34.     Certificate  of  Deposit 


BANKS  AND  THEIR  FUNCTIONS  445 

Such  a  deposit  is  not  subject  to  checking  and  usually  earns  inter- 
est for  a  definite  period.  It  may  be  made  payable  on  demand  or 
at  a  stated  time.  Part  payments  may  be  entered  on  the  back  of 
the  certificate  or  the  old  certificate  taken  up  and  a  new  one 
issued. 

Spoiled  Checks. — With  proper  care  in  writing  checks  few,  if 
any,  should  be  spoiled.  When  checks  are  spoiled,  however, 
several  methods  of  handling  are  used  but  either  of  the  methods 
described  will  usually  be  satisfactory.  The  simpler  method  is  to 
correct  the  stub  record,  destroy  the  spoiled  check  and  use  in  its 
stead  a  new  check  detached  from  the  back  of  the  check  book  or 
secured  from  the  bank  which  keeps  loose  blank  checks  (known  as 
''counter"  checks)  for  this  and  other  purposes.  Some  concerns 
insist  that  no  papers  be  destroyed.  Here,  the  spoiled  check  is 
attached  to  its  stub  and  marked  "Void"  or  "Not  Good"  across 
the  face  and  the  signature,  if  made,  is  torn  off  and  destroyed. 
If  it  is  desirable  for  the  cash  disbursements  journal  to  show  in 
numerical  sequence  all  checks,  the  spoiled  check  should  be 
entered  and  adequate  explanation  (including  reference  to  the  new 
check  issued  in  its  stead)  given,  but  no  amount  should  be 
extended  in  the  money  column,  through  which  a  line  is  drawn  to 
prevent  any  entry  therein. 

Collections. — In  discussing  deposits  it  was  stated  that  checks 
of  all  kinds  are  received  as  deposits  by  banks.  On  the  part  of 
the  bank  this  implies  that  the  banker  will  present  the  checks  to 
the  banks  on  which  they  are  drawn,  and  get  money  in  return  for 
them.  Were  it  necessary  for  every  business  man  to  present  all 
checks  received  to  the  various  banks  on  which  they  are  drawn,  it 
would  so  complicate  and  delay  the  collection  of  the  moneys  repre- 
sented by  them  that  their  efficiency  for  the  transaction  of  business 
would  be  largely  eliminated.  The  banks  have  accordingly  built 
up  the  machinery  for  collecting  these  items  for  the  business  man. 
The  bank  is  safe  in  doing  this  because  every  depositor  guarantees 


446  FUNDAMENTALS  OF  ACCOUNTING 

the  collection  of  the  items  turned  over  to  the  bank  for  deposit. 
Banks  not  only  collect  checks,  but  also  promissory  notes,  bond 
coupons,  drafts,  etc.  Other  valuable  and  important  papers  are 
often  transferred  through  the  bank's  collection  department.  The 
banker  usually  makes  a  small  charge  for  these  collections,  inas- 
much as  a  great  deal  of  work  is  involved  and  funds  often  have  to 
be  transferred  by  insured  express  in  order  to  accomplish  the  col- 
lection. These  charges  are  called  ''collection"  and  are  usually  a 
small  fraction  of  i%  of  the  amount  collected.  A  recent  order  of 
the  federal  reserve  banks  to  all  member  banks  will,  it  is  hoped, 
have  the  effect  of  doing  away  with  the  collection  charges  on 
checks. 

Stopping  Payment. — A  depositor  has  control  over  the  payment 
of  any  check  which  he  draws,  up  to  the  time  it  is  presented  at  the 
bank  for  payment.  If  he  finds  that  the  check  has  been  written 
in  error,  that  the  amount  is  wrong,  that  it  has  been  issued  fraud- 
ulently under  a  misapprehension,  or  if  for  any  other  reason  he 
desires  to  prevent  its  payment,  he  may  do  so  by  written  notifica- 
tion to  his  bank.  He  may  telephone  in  order  to  stop  payment, 
but  legally  a  written  notice  is  required.  This  notice  must  con- 
tain the  date  of  the  check,  its  number,  amount,  and  the  name  of 
the  payee,  in  order  to  enable  the  banker  to  identify  the  check. 
No  one  but  the  depositor  has  a  right  to  stop  payment  on  a  check 
drawn  by  him. 

Overdrafts. — When  a  depositor  writes  a  check  for  a  larger 
amount  than  he  has  on  deposit  in  the  bank,  he  is  said  to  over- 
draw his  account.  It  is  contrary  to  good  banking  practice  to 
permit  this.  An  overdraft  is  in  the  nature  of  an  open  account 
loan  made  by  the  banker  to  a  depositor,  and  unless  a  depositor's 
credit  is  high  the  overdraft  will  not  be  allowed.  If  a  check  is 
presented  for  payment  in  amount  larger  than  the  depositor's 
available  balance,  payment  may  be  refused  and  the  check  re- 
turned with  the  bank's  notification  "Insufficient  Funds,"  or 


BANKS  AND  THEIR  FUNCTIONS  447 

similar  phraseology.  If  a  depositor  keeps  accurate  record  of  his 
bank  balance,  there  is  no  excuse  for  overdrawing  his  account. 
The  practice  is  bad  and  should  never  be  resorted  to  excepting 
with  the  previous  consent  of  the  bank.  The  depositor  should  be 
willing  to  pay  interest  on  all  overdrafts. 

Dishonoring  Checks. — Checks  are  negotiable  instruments  and 
may  be  formally  dishonored  in  the  same  way  as  promissory  notes. 
In  order  to  protect  the  rights  of  the  various  parties,  formal  notice 
of  protest  may  become  necessary.  This  procedure  is  explained 
in  the  previous  chapters. 

The  Clearing  House. — The  clearing  house  is  the  means  used 
by  banks  to  collect  checks  and  other  items  drawn  on  each  other. 
Thus,  if  a  person  deposits  in  bank  A  a  check  for  $1,000  drawn 
on  bank  B,  bank  A  collects  the  check  for  its  depositor.  In  the 
course  of  the  day's  business,  others  also  may  have  deposited  in 
bank  A  checks  on  bank  B,  the  total  amount  which  bank  A  must 
collect  from  bank  B  being,  at  the  close  of  the  day,  $4,000,  let  us 
say.  At  the  same  time  bank  B  may  have  received  on  deposit 
checks  drawn  on  bank  A  for,  say,  $2,500.  Instead  of  bank  A 
presenting  all  checks  drawn  on  bank  B  and  getting  the  money  on 
them,  and  bank  B  presenting  all  checks  drawn  on  bank  A  and  get- 
ting the  money  on  them,  the  two  banks  come  together  and  find 
the  difference  between  the  two  groups  of  checks.  Canceling 
equal  amounts,  only  the  excess — $1,500  due  bank  A  in  this  case — 
has  to  be  collected  in  actual  money. 

Where  there  are  a  large  number  of  banks  in  a  locality,  they 
form  a  central  clearing  house  to  which  all  checks  on  other  banks 
are  sent  in  the  custody  of  clerks  for  collection.  Here,  all  of  the 
checks  drawn  on  bank  A,  let  us  say,  and  deposited  in  the  other 
banks  are  balanced  off  against  all  of  the  checks  on  other  banks 
which  have  been  deposited  in  bank  A,  and  bank  A  receives  or 
pays  in  actual  money  only  the  differences.  Thus  there  may  be 
fifty  bankers  with  claims  against  bank  A,  while  bank  A  may  have 


448  FUNDAMENTALS  OF  ACCOUNTING 

claims  against  many  or  all  of  these  same  fifty  banks.  The  money 
paid  into  the  clearing  house  by  the  banks  with  adverse  balances 
will  be  used  to  pay  those  banks  which  have  favorable  balances. 
In  this  way  the  banks  do  not  make  individual  adjustments  with 
each  of  the  other  banks,  but  with  all  of  them  combined.  Ac- 
cordingly, payments  are  not  made  by  one  bank  to  each  of  the 
individual  banks  which  it  may  owe,  but  each  bank  pays  its  ad- 
verse balance  to  the  clearing  house,  which  in  turn  makes  pay- 
ment to  member  banks  having  favorable  balances.  The  clearing 
house,  therefore,  as  its  name  implies,  serves  as  a  place  through 
which  are  cleared  the  claims  of  member  banks  against  each  other. 
Through  the  machinery  of  the  clearing  house  the  collection  of 
checks  and  other  items  has  been  expedited  and  simplified  to  an 
almost  unbelievable  degree. 

Questions 

i.  What  is  a  bank? 

2.  Why  has  a  bank  more  money  than  the  original  investment? 

3.  What  is  meant  by  "depositor"? 

4.  What  is  meant  by  "extending  credit"? 

5.  Tell  all  you  can  about  a  bank's  chief  source  of  income. 

6.  What  are  the  incidental  sources  of  income  for  a  bank? 

7.  Distinguish  between  commercial  banks  and  savings  banks. 

8.  Where  does  each  of  the  following  classes  of  banks  get  its  authority 
to  do  business: 

(a)  National  banks? 

(b)  State  banks? 

(c)  Trust  companies? 

9.  Explain  briefly  the  general  plan  of  the  federal  reserve  banking 
system. 

10.  Explain  briefly  the  plan  on  which  each  of  the  following  savings 
banks  is  operated: 

(a)  United  States  postal  savings  bank 

(b)  State  savings  bank 

(c)  Mutual  savings  bank 

(d)  Stock  savings  bank 


BANKS  AXD  THEIR  FUNCTIONS  449 

ii.  Explain  the  functions  of  the  commercial  bank. 

12.  Explain  the  functions  of  the  savings  bank. 

13.  Describe  the  procedure  in  opening  an  account  with  a  business  bank. 

14.  (a)  What  is  a  deposit  ticket? 
(b)  How  is  it  used? 

15.  (a)  Why  is  it  desirable  to  keep  a  copy  of  the  deposit  ticket? 

(b)  Should  any  additional  information  in  regard  to  the  deposit  be 
kept?    Why? 

16.  (a)  What  is  the  function  of  the  bank  pass-book? 
(b)  Describe  its  ruling. 

17.  Describe  the  procedure  in  withdrawing  money  from  a  commercial 
bank. 

18.  What  are  the  five  essential  items  of  a  check? 

19.  (a)  Name  two  non-essential  items  of  a  check. 

(b)  Why  are  these  two  non-essentials  oftentimes  very  convenient 
to  have  on  a  check? 

20.  (a)  Name  the  parties  to  a  check. 

(b)  What  other  names  may  be  substituted  for  the  name  of  a  per- 
son as  payee  on  a  check? 

21.  Compare  the  check  and  the  promissory  note. 

22.  Describe  the  form  of  a  check.    Illustrate. 

23.  Describe  the  procedure  in  drawing  a  check. 

24.  How  should  a  check  for  less  than  $  1  be  filled  out?    Illustrate. 

25.  (a)  What  is  an  indorsement? 
(b)  What  is  its  purpose? 

26.  (a)  Name  the  principal  kinds  of  indorsement, 
(b)  Illustrate  each  kind. 

27.  (a)  Discuss  alteration  of  checks. 

(b)  Discuss  protection  against  alteration  of  checks. 

28.  Who  suffers  the  loss  if  a  bank  pays  a  check: 

(a)  Having  a  forged  signature? 

(b)  Having  a  raised  amount? 

29.  Why  is  it  important  to  keep  a  record  of  all  dealings  with  a  bank? 

30.  Why  should  the  stub  containing  the  essential  memoranda  of  a 
check  be  written  first? 

31.  Explain  the  transit  number  on  a  check. 

32.  (a)  In  what  way  can  the  transit  number  be  used  in  connection 
with  the  record  of  deposits? 

(b)  Inhowmuthdetailshouldtherecordofdepositsbekept?   Why? 

33.  (a)  Why  is  the  reverse  of  the  check  stub  or  interleaf  a  convenient 
place  to  record  deposits? 


450  FUNDAMENTALS  OP  ACCOUNTING 

(b)  What  are  the  advantages  of  totaling  deposits  and  checks 
separately? 

34.  In  what  two  forms  do  the  bank's  dealings  with  the  depositor 
appear?    Explain  each. 

35.  What  is  meant  by  reconciliation  of  the  depositor's  account  and 
the  bank  account? 

36.  What  two  methods  of  reconciliation  are  used? 

37.  Explain  in  detail  the  procedure  for  one  method  of  reconciliation. 
Illustrate  a  reconciliation  statement. 

38.  Does  the  reconciliation  statement  always  show  the  true  balance 
available  for  checking?    Explain. 

39.  Illustrate  the  method  for  finding  the  true  balance  available  for 
checking. 

40.  What  is  a  certified  check?     Who  may  have  a  check  certified? 

41.  Illustrate  the  form  of  certification. 

42.  (a)  What  is  the  purpose  of  certification? 
(b)  Advantage? 

43.  (a)  What  is  a  cashier's  check?     How  used? 

(b)  Explain  the  purpose  and  use  of  a  certificate  of  deposit. 

44.  Explain  how  spoiled  checks  should  be  handled. 

45.  (a)  What  service  do  banks  render  under  the  term  ''collection"? 
(b)  Of  what  advantage  is  that  to  the  business  man? 

46.  (a)  How  may  payment  be  stopped  on  a  check? 

(b)  What  information  must  be  furnished  to  the  banks? 

(c)  Who  may  stop  payment? 

47.  Discuss  "overdraft"  as  applied  to  bank  accounts. 

48.  In  what  way  will  accurate  records  of  dealings  with  the  bank  pre- 
vent accidental  overdrafts? 

49.  Under  what  conditions  will  checks  be  dishonored? 

50.  What  is  a  clearing  house? 

51.  Discuss  briefly  the  operation  of  a  clearing  house. 

52.  What  are  the  advantages  of  a  clearing  house? 

Problems 

1.  On  January  24, 19 — ,  H.  Sutherland  draws  check  #11 5  on  the  Mer- 
chants National  Bank  of  Cincinnati,  Ohio,  for  $260.53  in  favor  of  F.  H 
Locke.     Prepare  the  check. 

2.  On  November  12,  19 — ,  the  Areola  Manufacturing  Company 
draws  check  #865  on  the  Harrison  Bank  of  Commerce,  amounting  to 
$1,542.33  for  pay-roll  purposes. 


BANKS  AND  THEIR  FUNCTIONS  451 

(a)  Draw  the  check  to  the  order  of  "  Pay-Roll." 

(b)  Give  the  entry  to  be  made  in  the  cash  book  of  the  company. 

3.  Edward  Harrison,  a  high  school  teacher  of  Lancaster,  Pa.,  has 
purchased  books  from  the  Macmillan  Company  of  New  York,  amounting  to 
$115.39  which  he  remits  by  certified  check  #153,  drawn  on  the  Lancaster 
National  Bank,  dated  April  23,  19—.  • 

(a)  Draw  the  check  to  be  sent  to  the  Macmillan  Company,  signing  the 
maker's  name. 

(b)  Show  the  check  certified  by  the  bank. 

4.  You  have  received  a  check  on  the  Liberty  National  Bank  of  New 
York  City,  dated  May  5,  19—,  payable  to  the  order  of  S.  Brennan,  who 
transferred  the  check  by  a  blank  indorsement  to  G.  Edwards.  The  latter 
indorsed  the  check  in  full  and  transferred  it  to  you.  You  now  wish  to 
transfer  the  check  to  James  Harris,  but  you  do  not  wish  to  be  held  liable 
for  the  payment  of  the  check. 

(a)  Draw  the  check. 

(b)  Show  the  successive  indorsements  up  to  the  time  you  received 
the  check. 

(c)  Show  the  indorsement  you  would  use. 

5.  On  April  15,  19 — ,  the  cashier  of  the  firm  of  Moore  and  Canfield 
has  the  following  to  deposit  with  the  Guaranty  Trust  Company  of  New 
York :  $  100  in  large  bills ;  $80  in  small  bills ;  $  10  in  silver ;  $1 50  check  on  the 
Hanover  Trust  Co.  (2-32);  $250  check  on  the  Harriman  National  Bank 

(1-15)- 

(a)  Prepare  the  deposit  slip. 

(b)  Show   the  checks  indorsed,   using   the  restrictive  indorsement. 

(c)  Prepare  the  record  you  would  make  of  this  deposit  in  your  check 
book. 

6.  You,  as  manager  of  the  Cleveland  Trust  Company,  have  received 
a  letter  from  Charles  Sommers  of  Cleveland,  Ohio,  dated  November  15, 
19 — ,  informing  you  that  he  wished  to  open  an  account  with  your  bank. 
Write  a  brief  letter  explaining  what  he  must  do  to  become  a  regular  deposi- 
tor of  your  bank. 

7.  On  March  17,  19 — ,  the  Hamilton  Trust  Company  of  Paterson, 
N.  J.,  informs  George  Radcliffe  of  the  same  city  that  a  check  amounting  to 
$169.75  and  deposited  by  him  on  the  15th  inst.  has  been  found  uncollect- 
ible because  of  insufficient  funds  to  the  credit  of  the  maker,  S.  B.  Wright. 
The  check  was  drawn  on  the  Hackensack  National  Bank,  Hackensack, 
N.  J.,  and  was  dated  March  13,  19 — . 


452  FUNDAMENTALS  OF  ACCOUNTING 

(a)  Draw  the  check. 

(b)  Give  the  entries  to  be  made  by  Radcliffe  in  the  cash  book  and 
the  check  book  at  the  time  the  check  is  received. 

(c)  At  the  time  it  is  returned. 

(d)  Would  Wright  make  any  entry  when  the  check  is  found  uncollect- 
ible?    Discuss  fully  and^ive  reasons. 

Note :  A  check  found  uncollectible  by  the  bank  is  returned  by  the  bank 
to  the  depositor,  and  his  account  is  charged  on  the  books  of  the  bank. 
When  the  depositor's  pass-book  is  next  balanced  or  the  monthly  statement 
of  account  is  rendered,  the  bank  includes  with  the  canceled  checks  re- 
turned a  "  charge  ticket "  covering  the  uncollectible  check  charged  against 
the  account  and  previously  returned  to  the  depositor. 

When  the  bank  returns  the  check,  the  depositor  will  usually  present  it 
(in  person,  or  by  letter)  to  the  maker  for  payment.  If  paid  in  cash  by  the 
maker,  he  should  correct  the  original  cash  book  entry  of  the  check  to  show 
that  payment  was  made  by  cash  rather  than  by  check.  The  check  should 
be  marked  "Void"  and  the  check  book  stub  record  corrected  to  show  that 
that  check  was  not  paid  by  the  bank.  The  maker  may,  however,  have 
deposited  sufficient  funds  in  the  meanwhile,  and  may  ask  that  the  check  be 
presented  to  his  bank  for  collection.  In  which  event,  the  check  may  be 
sent  direct  to  the  maker's  bank  or  deposited  in  the  depositor's  bank  again 
and  collected  in  regular  course. 

8.  On  September  15,  19 — ,  H.  Claflin,  Inc.,  one  of  your  creditors, 
returns  your  check  #756,  dated  September  10,  19 — ,  for  $253.62  and 
drawn  on  the  Manhattan  Exchange  Bank  of  New  York  City,  due  to  lack  of 
signature. 

(a)  What  would  you  do  with  the  check  upon  its  receipt  from  Claflin, 
Inc.? 

(b)  Give  the  entries  to  be  made  by  Claflin,  Inc.,  in  their  cash  book  and 
check  book,  assuming  that  they  did  not  detect  the  lack  of  signature  until  it 
was  called  to  their  attention  by  the  bank  when  they  attempted  to  deposit  it. 

9.  The  Arrow  Merchandise  Company  of  New  York  City,  makes  the 
following  deposits  with  the  Mechanics  National  Bank  of  the  same  city: 

19- 

October    3  Total  deposit  $253.65 

10  Total  deposit  145.76 

15  Total  deposit  io5-25 
27  90-day  note        $500  - 

Discount — 6%         7.50  492.50 


BANKS  AND  THEIR  FUNCTIONS  453 

During  the  same  month  the  following  checks  were  issued: 

#925  Carlton  Silk.  Company  10/  5  $135.46 

926  Holeproof  Hosiery  Company  10/  5  146.55 

927  Pay-Roll  10/10  450  - 

928  S.  Bradford  10/25  365.47 

The  balance  on  hand  October  1  was  $465.28. 

(a)  Show  these  deposits  and  checks  as  entered  on  the  check  book  stub. 

(b)  Reconcile  the  bank  balance  with  the  check  book  below. 

10.  On  November  1,  19—,  F.  E.  Camper  of  Kansas  City,  Kans., 
received  his  monthly  statement  from  the  bank  in  which  his  balance  was 
represented  as  $740.80.  His  check  book  showed  a  balance  of  $543.65  on 
same  date.  In  comparing  the  canceled  vouchers  with  the  check  stubs  he 
finds  that  the  following  checks  were  outstanding: 


Amount 

#iS5 

$56.73 

157 

68.29 

158 

46.75 

160 

25-38 

iare 

the  reconciliation  statement. 

11.  The  cash  book  of  the  Nixon  Specialties  Company  shows  on  July  1, 
19 — ,  a  balance  of  $12,901.67  in  cash  at  the  National  Bank  of  Commerce. 
The  bank,  however,  in  its  monthly  statement  shows  their  balance  to  be 
$15,500.  In  comparing  the  canceled  checks  with  the  check  stubs,  their 
bookkeeper  finds  the  following  checks  outstanding: 

Amount 
#465  $3,506.75 

469  46S-93 

470  125.65 

He  also  finds  that  a  check  on  an  out-of-town  bank  amounting  to  $1 ,500, 
which  was  deposited  on  June  29,  was  not  credited  to  the  company  by  the 
bank.     Reconcile  the  bank  balance  with  the  cash  book  balance. 

12.  The  treasurer  of  the  Harrison  Manufacturing  Company  has  re- 
ceived, January  31,  19 — ,  a  monthly  statement  from  their  bank,  the 
Harrison  National  Bank,  which  shows  that  disbursements  by  check 
amounted  to  $15,343.16  and  deposits  during  the  same  period  amounted  to 
$17,397.91.  The  bank  represents  the  company's  balance  of  cash  on  hand 
as  $2,054.75  while  the  cash  book  balance  amounts  to  $1,747.40.     After 


454  FUNDAMENTALS  OF  ACCOUNT  I XG 

comparing  the  check  book  stubs  with  the  canceled  checks,  he  finds  the 
following  checks  still  outstanding: 


Amount 

#816 

$135-63 

820 

45-65 

825 

129.42 

According  to  the  bank's  statement  interest  on  the  bank  balance  has 
been  credited  to  the  firm  amounting  to  $12.40,  while  their  account  was 
charged  with  $15.75  for  collection  items. 

(a)  Draw  up  the  reconciliation  statement. 

(b)  Give  the  entries  to  be  made  by  the  company  to  record  the  interest 
credit  and  collection  charges. 

13.  On  March  1,  19 — ,  the  Anderson  National  Bank  represents  the 
balance  of  the  Barrett  Grocery  Company  as  $2,513.55,  while  the  firm's 
cash  book  shows  a  balance  of  $2,444.12.  Outstanding  checks  are  as 
follows : 

Amount 

#743  $i50-75 

746  35-88 

753  49-78 

In  examining  the  canceled  vouchers  the  bookkeeper  notices  a.  charge 
ticket  covering  a  check  amounting  to  $166.98  which  had  been  deposited 
and  returned  uncollectible.  He  had  failed  to  make  a  correcting  entry  at 
the  time  the  check  was  returned.  The  check  was  made  by  H.  Adams,  one 
of  their  customers. 

(a)  Prepare  the  reconciliation  statement. 

(b)  Give  the  correcting  entry. 

14.  Dr.  R.  McPherson  cannot  reconcile  his  check  book  balance  with 
the  balance  as  shown  by  the  bank  statement.  He  asks  you  to  help  him 
find  the  trouble. 

His  bank  balance  amounts  to  $495.65,  while  according  to  his  check 
book  the  balance  is  $387.27  for  the  same  period.  According  to  his  pass- 
book the  total  deposits  amount  to  $850.75  and  canceled  vouchers  amount 
to  $355.10.  His  check  book  shows  total  deposits  for  the  same  period  to 
be  $832.75  and  checks  disbursed  to  be  $436.48. 

Upon  investigation  you  find  that  the  bank's  deposit  figure  is  correct, 
the  doctor  having  entered  a  $52  check  on  his  check  book  stub  as  $25  when 
recording  his  deposits. 


BAXKS  AND  THEIR  FUNCTIONS  455 

The  following  checks  are  still  outstanding: 

Amount 

#154  $35-63 

x55  45-75 

(a)  Prepare  the  reconciliation  statement. 

(b)  Explain  the  difficulty. 

15.  A  series  of  transactions  to  be  recorded  in  the  blank  books  provided 
— continued  from  Problem  14,  Chapter  XXV. 

This  represents  the  second  month  of  the  first  quarter  of  Mr.  Thatcher's 
business  for  19 — . 

February,  19 — . 

1.  Received  check  for  $58.20  from  Amos  K.  McBride  for  balance 
owed  us  December  31.  Rented  office  space  in  our  store  to 
William  H.  Powell.  He  paid  in  advance  for  the  month  by 
check  $60. 
4.  Sold  merchandise  to  Roy  A.  Parks,  Omaha,  Neb.,  $2,425,  terms 
2/20,  n/ 40. 

6.  Bought  $3,795.80  in  merchandise  from  Chester  Pierce,  St.  Paul, 

Minn.,  terms  3/20,  n/60. 

7.  Sales  of  merchandise  for  cash  to  sundry  customers  $17,3 72.65. 

8.  Amos  K.  McBride  sent  us  New  York  exchange  consisting  of 

draft  for  $632  drawn  by  the  First  National  Bank  of  Pittsburgh, 
Pa.,  E.  J.  Turner,  Cashier,  on  the  Chemical  National  Bank  of 
New  York,  February  6, 19 — ,  in  payment  of  his  30-day  note  of 
January  9. 

9.  Sent  our  certified  check  for  $904.50  to  Chester  Pierce,  in  pay- 

ment of  our  30-day  note  for  $900  of  1/10/ —  and  accrued 
interest. 

1 1 .  Roy  A.  Parks  returned  $300  of  merchandise  from  sale  #5,  claiming 

part  of  the  order  had  been  filled  twice.  Upon  investigation  we 
found  his  statement  correct  and  sent  him  credit  memorandum 
for  $300. 

12.  Paid  in  cash:  office  salaries  $300;  salesmen's  salaries  $225. 

14.  Paid  Foster  Brothers  by  check  for  stationery  and  other  office  sup- 

plies $43.75. 

15.  Craig  and  Drury  of  Baltimore,  Md.,  became  bankrupt  some  time 

ago  and  at  a  meeting  of  the  creditors  it  was  agreed  to  accept  30 
cents  on  the  dollar.  Today  we  received  a  certified  check  for 
$146.55,  drawn  on  the  Union  Trust  Company  of  Baltimore  by 


456  FUNDAMENTALS  OF  ACCOUNTING 

their  attorneys,  Daniels,  Sims  and  Wood,  in  full  settlement  of 
our  account.  (The  loss  on  this  account  should  be  transferred  to 
Bad  Debts  account,  and  carried  there  until  the  ledger  is  closed.) 

17.  Sold  merchandise  to  Homer  Welbrun  $3,457.35,  terms  2/30,11/60. 

Deposited  in  the  bank  coupons  from  Liberty  bonds  $24.50. 
This  includes  the  accrued  item  of  $  1 8. 50  of  December  3 1 . 

18.  Purchased  from  H.  M.  Scott  and  Company  $2,867.40  in  merchan- 

dise, terms  3/20,  n/60. 
21.     Received  from  H.  M.  Scott  and  Company  credit  memorandum  for 
$155,  covering  our  claim  for  allowance  on  invoice  of  2/18/ — 
for  goods  damaged  through  faulty  packing. 

24.  Roy  A.  Parks  sent  us  check  in  full  for  sale  #5,  less  discount. 

(Part  of  this  sale  was  returned  on  the  nth.) 

25.  Gave  Chester  Pierce  check  for  invoice  #5,  less  discount.     Cash 

sales  to  sundry  customers  $8,926.85.  Cash  purchases  from 
sundry  creditors  $14,371.10. 

27.  One  of  our  cash  customers  of  the  25th  proved  that  we  overcharged 

him  $100.     We  sent  him  check  for  that  amount. 

28.  Paid  by  check  $36  for  insurance  policy  #18643  issued  by  the 

Hudson  Insurance  Company  covering  stock  of  merchandise. 
Paid  cash  for  cleaning  windows  and  scrubbing  $8.40.     Mr. 

Thatcher  withdrew  cash  for  personal  use  $860.     Gave 

Railroad  check  for  freight  $238.16.  Distribute  $176.47  to 
Purchases;  balance  to  Sales.  Paid  cash  for  telephone  and 
telegraph  bill  $15.80. 

(a)  Record  all  the  above  transactions  in  the  various  journals. 

(b)  Summarize  the  cash,  sales,  and  purchase  journals  and  balance  the 
cash  book. 

(c)  Post  and  obtain  a  trial  balance,  recording  it  on  pages  32  and  34 
of  the  journal  blank,  heading  the  fifth  and  sixth  columns, "  Feb.  28, 19 — ." 
(This  problem  is  concluded  in  Problem  14,  Chapter  XXVII). 


CHAPTER   XXVII 
BILLS   OF   EXCHANGE— DRAFTS 

Purpose  of  Chapter. — 

i .  Form  and  content  of  drafts. 

2.  Acceptance  and  protest  of  drafts. 

3.  Bookkeeping  entries  for  drafts. 

4.  Form  and  content  of  trade  acceptances. 

5.  Advantages  over  open  accounts. 

Origin  of  Drafts. — It  is  not  definitely  known  when  drafts 
first  came  into  use.  There  is  some  evidence  that  the  Greeks  and 
Romans  used  certain  forms  of  drafts.  It  is  said  that  Cicero  re- 
mitted money  to  his  son  in  Athens  by  means  of  a  draft.  Bills  of 
exchange  were  used  in  Italy  in  the  thirteenth  century  and  found 
their  way  into  England  shortly  after.  The  foreign  bill  of  ex- 
change was  used  before  the  domestic  or  inland  bill.  Following 
the  dark  ages,  during  which  there  was  little  intercourse  between 
nations,  came  a  period  in  which  trade  and  intercourse  sprang  up 
again.  However,  travel  was  hazardous  and  the  shipping  of 
goods  and  especially  of  moneys  was  fraught  with  danger.  The 
draft,  or  bill  of  exchange,  came  into  use  at  this  time  largely  to  do 
away  with  the  hazards  attendant  upon  the  transfer  of  funds  for 
the  settlement  of  debts  between  merchants.  Only  after  many 
years  of  use,  however,  did  the  laws  of  the  various  countries  give 
legal  status  to  the  business  customs  and  procedure  which  grew 
up  around  its  use.  This  code  of  law  is  spoken  of  in  the  great 
body  of  English  law  as  the  "Law  Merchant,"  from  the  fact  that 
it  developed  from  the  practice  of  merchants. 

Purpose  of  the  Draft. — The  use  of  the  draft  is  illustrated  by 
the  following  transactions.     Jones,  a  grain  merchant  of  Chicago, 

457 


458  FUNDAMENTALS  OF  ACCOUNTING 

has  shipped  a  cargo  of  grain  to  Green  Brothers,  of  Norfolk,  who 
are  thus  in  debt  to  him.  However,  Green  Brothers  have  a  claim 
against  the  Jackson  Company,  of  New  York,  for  commodities 
sent  to  it  some  time  ago.  In  order  to  pay  Jones  the  amount  they 
owe  him,  Green  Brothers  transfer  to  Jones  as  much  of  their  claim 
against  the  Jackson  Company  as  is  necessary  to  settle  with  Jones. 
In  other  words,  Green  Brothers  write  the  Jackson  Company, 
asking  them  to  pay  to  Jones,  of  Chicago,  a  certain  amount  of 
their  debt  to  Green  Brothers.  An  informal  draft  or  a  request 
made  by  one  party  to  the  other  to  make  payment  may  be 
illustrated  by  the  following  letter : 

Norfolk.  Va., 

November  25,  1921. 
The  Jackson  Company, 

New  York,  New  York. 
Gentlemen: 

Kindly  pay  to  Jones  of  Chicago  One  Thousand  Dollars  ($1,000)  and 
charge  to  our  account. 

Very  truly  yours, 
Green  Brothers. 

The  purpose  of  the  draft,  therefore,  is  to  settle  debts  through 
transferring  claims  by  means  of  a  written  order.  There  is  a  mani- 
fest saving  in  this  since  funds  do  not  have  to  be  transferred 
among  the  various  parties,  but  only  the  unpaid  balance  re- 
mitted to  settle  the  debts  arising  out  of  the  two  transactions. 
The  draft  transaction  is  really  an  application  of  the  clearing 
house  method  explained  in  connection  with  checks.  In  general 
we  may  say  that  the  use  of  the  draft  arises  from  a  transaction 
entered  into  for  the  purpose  of  settling  a  debt  where  the  transfer 
of  funds  would  be  necessary. 

Kinds  of  Drafts. — Drafts  are  classified  on  several  bases: 

1.  Geographically  as  to  place 

2.  As  to  time  of  payment. 

3.  As  to  the  parties. 


BILLS  OF  EXCHANGE— DRAFTS  459 

1.  Classified  geographically  as  to  place,  drafts  are: 

(a)  Domestic,  or  inland,  drafts,  drawn  and  payable  within 

the  same  state. 

(b)  Foreign  drafts,  drawn  in  one  state  but  payable  in  some 

other  state  or  foreign  country. 

Thus  a  draft  drawn  in  New  York  and  payable  in  Chicago 
becomes  a  foreign  draft.  Similarly,  a  draft  drawn  in  New  Orleans 
and  payable  in  Brazil  is  a  foreign  draft  A  draft  drawn  in  San 
Francisco  but  payable  in  Los  Angeles  is.  however,  a  domestic; 
or  inland,  bill. 

2.  Classified  as  to  time  of  payment,  drafts  are: 

(a)  Sight  drafts,  which  are  to  be  paid  when  first  seen  by  the 

parties  on  whom  they  are  drawn. 

(b)  Time  drafts,  to  be  paid  some  time  after  they  are 

presented  or  seen. 

Time  drafts  may  be  drawn  for  a  certain  number  of  days  after 
sight  or  after  date.  When  a  draft  is  payable  after  sight,  it  is  im- 
portant that  the  party  on  whom  it  is  drawn  be  found  and  pre- 
sented with  or  shown  the  draft  in  order  to  establish  the  date  irom 
which  the  date  of  payment  is  determined.  A  draft  payable  a 
certain  time  after  date,  however,  has  its  payment  date  determined 
by  counting  forward  from  the  date  on  which  it  was  drawn. 

3.  As  to  the  names  of  the  parties,  drafts  are  sometimes  classi- 
fied as  bank  drafts  or  commercial  drafts.  If  one  bank  requests 
another  bank  to  make  payment,  the  request  is  a  bank  draft, 
whereas  if  one  merchant  requests  another  merchant  to  make  pay- 
ment, the  request  is  a  commercial  draft.  Except  for  the  trans- 
action of  foreign  business,  the  commercial  draft  is  little  used  at 
present. 

The  Parties  to  a  Draft. — By  reference  to  the  informal  lettei  of 
request  above,  the  student  may  become  familiar  with  the  titles 
given  to  the  various  parties.  The  party  making  the  request,  in 
this  case  Green  Brothers,  is  called  the  drawer,  the  one  who  draws 


460  FUNDAMENTALS  OF  ACCOUNTING 

the  draft  or  request.  The  party  to  whom  the  request  is  made, 
in  this  case  the  Jackson  Company,  is  the  drawee,  the  one  on 
whom  the  draft  is  drawn.  The  party  in  whose  favor  the  request 
is  made,  in  this  case  Jones,  of  Chicago,  is  called  the  payee. 

Since  the  draft  transaction  arises  from  the  transfer  of  funds 
for  the  settlement  of  debts,  therefore  it  presumes  there  is  a  debtor 
and  creditor  relationship  between  the  parties.  For  example,  the 
Jackson  Company,  of  New  York,  owes  Green  Brothers,  of  Nor- 
folk, who  in  turn  owe  Jones,  of  Chicago.  The  accepted  draft, 
however,  is  a  negotiable  instrument,  and  as  such  has  all  the 
guaranties  of  the  promissory  note.  For  example,  if  the  Jackson 
Company  agrees  to  the  request  made  of  them  by  Green  Brothers, 
they  become  primarily  liable  to  Jones,  of  Chicago,  who  may  now 
look  to  them  and  even  enforce  at  law  the  claim  which  he  now  has 
against  them.  Although  there  was  originally  no  debtor  and 
creditor  relationship  between  them,  the  accepted  request  es- 
tablishes it,  inasmuch  as  the  three  parties  have  now  agreed  to 
settle  their  respective  debts  or  some  portion  of  them  in  this 
way. 

Content  of  the  Draf t. — The  draft  in  order  to  be  a  negotiable 
instrument : 

i .  Must  show  the  place  and  the  date  of  the  draft  or  request. 

2.  Must  contain  a  written  order,  usually  in  the  words  "Pay 

to  the  order  of,"  or  "Pay  to  bearer." 

3.  Must  give  a  definite  or  determ'nable  date  when  the 

request  is  to  become  effective,  either: 

(a)  At  sight,  or 

(b)  At  a  certain  time  after  sight  or  after  date. 

4.  Must  give  the  name  of  the  payee  to  whom  payment  is  to 

be  made. 

5.  Must  name  the  amount  of  the  payment  in  both  words  and 

figures. 

6.  Must  be  signed  by  the  party  making  the  request,  that  is, 

the  drawer. 


BILLS  OF  EXCHANGE— DRAFTS 


46I 


7.  Must  give  the  name  and  address  of  the  party  to  whom 

the  request  is  made,  that  is,  the  drawee. 

8.  To  be  binding  and  negotiable  must  show  on  its  face  that 

the  drawee  agrees  to  the  request  made  on  him.     This  is 
absolutely  essential. 

Form  of  the  Draft. — The  following  draft  forms  are  standard 
and  should  be  compared  with  the  informal  letter  of  request  above. 
The  main  difference  is  in  the  position  of  the  drawee's  name  and 
address.  Instead  of  being  in  the  upper  left-hand  corner,  it  is 
placed  after  the  body  of  the  letter  in  the  lower  left-hand  corner 
preceded  by  the  word  "To."  The  salutation  "Gentlemen,"  or 
"Dear  Sirs" — is  omitted.  Save  for  these  slight  differences,  the 
formal  draft  is  the  same  as  the  informal  request.     Form  35(a) 


&L&U 


NOV  26  1921 


/*£&-&  mLuKh^AJUA. '$C<^£urflL. 


/^-rd,-*-*^  ?)n^C^^f- 


CU-  ^i^^^J- ■Gfaiu's&y 


-^2?_ 


$ouia4J 


-2^     $&%**^£e-rL/' 


3«&*f-*    ffgk 


Form  35.     (a)  Sight  Draft 


j&U&L 


J^odSi 


f«>j 


If 


Form  35.     (b)  Time-after-Sight  Draft — Accepted 


462 


FUNDAMENTALS  OF  ACCOUNTING 


tsCa^t/  g_J&tisiS  aCex^tts 


&LG&*a&d. 


mla^M^Jmft^^cco^^i^^- 


fy?s>"t3 


(Zr^6j&U*S,   ?KocJj. 


Form  35.     (c)  Time-after- Date  Draft — Accepted 

gives  the  sight  draft,  Form  35(b)  a  draft  payable  at  a  definite 
time  after  sight,  and  Form  35(c)  a  draft  payable  after  date.  The 
student  should  compare  these  draft  forms  with  the  two  bank 
check  forms  illustrated  in  Chapter  XXVI.  Note  that  in  the  case 
of  the  check  the  drawee  is  always  the  bank  of  deposit,  that  is,  the 
bank  in  which  the  maker  of  the  check  keeps  his  funds.  The 
drawee's  name  is  at  the  head  of  the  check  in  one  case,  while  in 
the  other  it  follows  the  form  of  the  draft  and  appears  in  the  lower 
left-hand  corner.  The  names  of  the  payee  and  the  drawer  appear 
in  both  the  check  and  the  draft  at  relatively  the  same  places. 
Since  the  check  is  always  a  sight  draft,  the  words  "at  sight"  need 
not  appear  in  it.  Since  a  draft  may  be  either  sight  or  time  the 
wording  must  indicate  which  it  is. 

Definition  of  the  Draft. — As  defined  by  the  negotiable  instru- 
ment law,  a  bill  of  exchange  is  "an  unconditional  order  in  writing 
addressed  by  one  person  to  another,  signed  by  the  person  giving 
it  (drawer)  requiring  the  person  to  whom  it  is  addressed  (drawee) 
to  pay  upon  demand  or  at  a  fixed  or  determinable  future  time  a 
sum  certain  in  money  to  order  or  to  bearer  (payee)." 

The  Acceptance  of  a  Draft. — The  formal  draft  and  the  in- 
formal letter  are  nothing  more  than  requests.  Under  the 
circumstances  cited  in  the  example  above,  there  is  usually  no 


BILLS  OF  EXCHANGE— DRAFTS  463 

reluctance  or  hesitation  on  the  part  of  the  drawee  to  make  pay- 
ment as  requested.  Unless,  however,  the  debtor-creditor  rela- 
tionship existed  between  the  drawee  and  drawer,  the  drawee 
would  not  be  willing  to  pay  another  man's  debts.  Hence,  to  be 
binding  at  law,  it  is  essential  that  the  drawee  signify  his  willing- 
ness to  make  payment  as  requested  in  the  draft.  Without  such 
written  acceptance,  the  draft  has  no  more  legal  status  than  an 
ordinary  request.  This  acceptance  by  the  drawee  binds  him  to 
the  contract  as  stated  in  the  draft  and  makes  him  primarily 
liable.  The  acceptance  must  be  in  writing  and  signed  by  the 
drawee.  It  is  customary  to  give  the  date  of  acceptance  also. 
This  is  especially  important  in  the  case  of  a  time-after-sight  draft, 
inasmuch  as  the  date  of  acceptance  is  the  basic  date  from  which 
the  due  date  is  determined. 

Acceptance  is  usually  signified  by  writing  across  the  face  of 
the  draft  the  word  "Accepted"  and  the  date,  followed  by  the 
signature  of  the  drawee.  The  banks  frequently  act  as  inter- 
mediary parties  in  securing  acceptances.  Thus  in  the  illustration 
shown,  Green  Brothers,  of  Norfolk,  draw  a  draft  on  the  Jackson 
Company,  of  New  York,  but  instead  of  sending  it  to  the  Jackson 
Company  for  acceptance,  send  it  to  Jones,  of  Chicago,  who  either 
through  the  mails  or  through  his  bank  presents  it  to  the  Jackson 
Company,  of  New  York,  for  acceptance.  Upon  acceptance  the 
draft  is  returned  to  Jones,  of  Chicago,  who  holds  it  as  a  negotiable 
claim  against  the  Jackson  Company,  of  New  York.  If  upon 
presentation  of  the  draft  for  acceptance,  the  drawee  refuses  to 
accept,  it  must  be  returned.  The  drawee  has  a  legal  limit  of  24 
hours  in  which  to  accept  or  to  refuse  and  return  the  draft.  If  he 
destroys  it  or  refuses  to  return  it,  he  will  be  deemed  at  law  to  have 
accepted  it. 

Acceptances  are  of  two  kinds:  a  general  or  unconditional 
acceptance,  in  which  the  above  form  is  used,  and  a  qualified  ac- 
ceptance. A  qualified  acceptance  is  one  in  which  the  full  terms 
of  the  contract  as  stated  in  the  draft  are  not  accepted  but  some 
alteration  is  made  in  them  before  accepting.    Thus  the  drawee 


464  FUNDAMENTALS  OF  ACCOUNTING 

might  state  in  his  acceptance  that  he  will  pay  only  a  part  of  the 
amount  for  which  the  bill  is  drawn,  that  he  will  pay  at  a  particular 
place,  that  he  will  pay  at  some  other  time  than  the  time  stated,  or 
that  he  will  make  his  payment  dependent  upon  the  fulfilment  of 
some  condition  stated  in  the  acceptance.  A  draft  with  a  qualified 
acceptance  is  not  so  easily  negotiable  as  one  with  a  general  or 
unconditional  acceptance.  Forms  35(b)  and  35(c)  above  show 
drafts  with  acceptances. 

Maturity  of  Drafts. — Sight  drafts  are  payable  at  once.  Time- 
after-sight  drafts  are  payable  at  the  agreed  time  after  sight,  time 
beginning  to  run  from  the  date  of  acceptance.  The  date  of 
maturity  is  figured  in  the  same  way  as  the  date  of  a  promissory 
note  is  figured.  If  time  is  stated  in  months,  calendar  months 
are  implied.  On  time-after-date  drafts,  presentation  to  the 
drawee  for  acceptance  need  not  be  made  until  at  or  slightly  pre- 
vious to  the  date  of  maturity.  If,  however,  the  payee  desires  to 
negotiate  the  draft  to  another  party,  prior  to  date  of  maturity,  it 
is  better  for  the  draft  to  bear  the  acceptance  of  the  drawee. 
Accordingly,  it  is  good  business  practice  to  secure  the  acceptance 
of  all  drafts  as  soon  as  possible. 

The  Collection  Draft. — The  draft  is  often  used  as  a  "  dun  "  for 
the  collection  of  past-due  accounts.  Sales  are  frequently  made 
under  a  contract  somewhat  as  follows:  2%,  10  days,  net  30. 
(2/10,  n/30),  subject  to  sight  draft  without  notice.  This  means 
that  the  seller  of  the  goods  will  draw  a  sight  draft  on  the  customer 
if  payment  is  not  made  at  the  time  agreed  upon.  Such  a  draft 
is  usually  made  payable  to  the  drawer's  bank  or  to  "Ourselves," 
the  drawer  and  the  payee  being  one  and  the  same  party  in  the 
latter  case.  The  draft  is  usually  handled  through  the  drawer's 
bank,  which  will  send  it  either  direct  to  the  drawee  or  to  its  cor- 
respondent bank  at  the  drawee's  address  for  presentation  and 
collection. 

This  draft,  being  nothing  but  a  request,  has  no  stronger  legal 


BILLS  OF  EXCHANGE— DRAFTS  465 

status  than  any  other  request  for  payment  of  a  debt.  The  dis- 
honoring of  such  a  request  by  the  drawee,  however,  casts  discredit 
on  him  and  reflects  on  his  credit  standing  among  the  banks  in  his 
own  community.  On  the  other  hand,  it  may  happen  that  the 
drawee  has  a  greater  claim  against  the  drawer  because  of  un- 
satisfactory goods  or  past  claims  not  satisfactorily  settled.  In 
such  a  case,  the  drawee's  refusal  to  pay  should  not  discredit  him. 
The  dunning  draft  has  become  so  common  that  debtors  who  know 
its  purpose  and  legal  status  pay  no  more  attention  to  it  than  to  a 
letter  from  the  creditor  requesting  payment. 

Collection  drafts  are  never  accepted  by  the  bank  as  deposits 
to  the  drawer's  account.     They  are  accepted  for  collection  only 


1,1 


%/l<5~^=-  New  Ynrlc,        fl<L£j-£>J>J   2./  10*/ 

PAY  TO  THE 


Order  of  IRVING   NATIONAL  BANK 

N 


NEW   YORK 

Sf  00  — — •       ■   ■      ■ Dollars 


.Value  received  and  charge  same  to  account  of 


tJn  its'         JfaJ^^te^,  /dz^taJ) 


Form  36.     Collection  Draft 

and  will  be  credited  only  when  and  if  collection  is  made.     Form 
36  is  a  typical  form  of  collection  draft. 

C.O.D.  Collections  and  Accounts.— Another  type  of  draft  is 
frequently  used  for  the  collection  of  amounts  where  C.O.D.  (cash 
on  delivery)  sales  are  made  to  parties  whose  credit  standing  is 
poor  or  unknown.  Where  the  goods  are  not  to  be  delivered 
locally,  any  of  the  three  agencies  may  be  used,  viz.,  parcel  post, 
express,  or  freight.  The  post-office  handles  C.O.D.  transactions, 
collecting  the  amount  stated  and  remitting  it  to  the  seller.  The 
seller  must,  of  course,  prepay  the  postage,  the  cost  of  which,  how- 


466  FUNDAMENTALS  OF  ACCOUNTING 

ever,  may  by  agreement  be  collected  from  the  customer.  When 
the  express  company  is  used,  an  abstract  or  summary,  showing 
only  the  amount  to  be  collected  of  the  invoice  sent  to  the  cus- 
tomer, is  given  to  the  express  company.  It  places  this  in  a 
C.O.D.  envelope,  which  is  then  attached  to  the  package  to  be  de- 
livered. The  express  agent  at  destination  collects  the  amount 
called  for  by  the  abstract  of  invoice,  delivers  the  goods,  and  re- 
mits, usually  by  express  money-order,  direct  to  the  seller  the 
amount  collected.  The  express  and  collection  charges  may,  by 
agreement,  be  paid  either  by  customer  or  seller. 

Where  goods  are  shipped  by  freight  C.O.D. ,  instead  of  the 
straight  bill  of  lading,  the  shipper  must  secure  an  order  bill  of 
lading  (Form  37)  from  the  railroad.  This  differs  from  the 
straight  in  that  it  is  in  addition  an  order  to  the  freight  agent  at 
destination  not  to  deliver  the  goods  until  claimed  by  the  party 
holding  the  order  bill  of  lading.  The  shipper,  after  securing  the 
order  bill  from  the  railroad,  draws  a  draft  on  the  customer,  at- 
taches the  order  bill  of  lading,  and  gives  both  documents  to  his 
bank  for  collection.  The  bank  sends  both  to  its  correspond- 
ent bank  at  the  point  of  destination,  which  correspondent 
collects  the  draft  from  the  customer  and  then  delivers  to  him  the 
order  bill  of  lading.  The  customer  may  now  present  the  order 
bill  to  the  railroad  and  secure  the  goods.  The  correspondent 
bank  remits  the  amount  collected  (less  collection  charges)  and 
this  is  placed  to  the  credit  of  the  seller's  bank  account.  It  will 
be  noted  that  goods  shipped  by  freight  C.O.D.  are  not  sent  di- 
rectly to  the  customer  but  to  the  order  of  the  bank  with  instruc- 
tions to  notify  the  customer.  When  the  customer  pays  the  draft 
the  bank  indorses  the  order  bill  to  him.  The  order  bill  is  made 
out  in  sets  of  three  just  as  the  straight  bill. 

In  recording  C.O.D.  sales,  either  they  may  be  charged  to 
customers,  just  as  regular  sales,  a  memorandum  file  being  main- 
tained to  indicate  the  goods  out  on  C.O.D.  terms  at  a  given  time, 
or  all  such  sales  may  be  charged  to  a  "  C.O.D."  account  in  which 
the  various  customers'  names  will  appear  in  the  explanation 


BILLS  OF  EXCHANGE— DRAFTS 


467 


The  Pennsylvania  Railroad  Company 

Shipper's  No.  10140A 
Agent's  No. 


ORDER    BILL    OF    LADING — ORIGINAL. 


RECEIVED,  .ubjeet  10  lb.  cl.«,6c.lio„.  ,„d  ..rill,  io  elect  on  tb.  d.t.  .1  I„M  or  Ibi.  Origin.!  Bill  of  L.di„s, 

„f     Newark,  N.   J. 

- - : ' — --.•--- Augue  t  10 ,       1Q2\ 

from     The  Splitdorf  Mfg.  Co.  „  ' 

to  by  the  abipper  m,d  accepted  for  himself  aud  his  assicns  (inciuatnc  conditions  on  back  hereof)  and    which  nr«  *jer«a.i 

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1     i 

Consigned  to  order  of    Mrst  National  Bani . 

Deslinntion, .Newark, State  of  ...  N.    J. County  of   

Notify Henry.  1.   Schwanner  &  Co. _.. _ 

At       719  Lake  St.  ,  Milwaukee. _ State  of. WlBO. County  of... 

lionte, Car  Initial Car  No.. 


packages         DESCRIPTION  OF  ARTICLES  AND  SPECIAL  HARKS 


.10 Boxes  Mdae, 

Crates," . " 


1279 
843 


Spli.tdorf  M*g.   Co 
Per.  /fv 


Agent. 


Form  37.     Order  Bill  of  Lading 


468 


FUNDAMENTALS  OF  ACCOUNTING 


column.  When  collections  are  made  the  corresponding  credits 
will  be  entered  on  the  same  lines  as  the  debits.  The  account 
balance,  normally  a  debit,  shows  the  amount  of  uncollected 
C.O.D.  sales. 

C.  O.  D. 


19— 
Oct. 


J.  Thompson  S 
U.  S.  Grand  S 
A.  C.  Pickard  S 


19— 

17 

1,000 

- 

K) 

25O 

75 

Oct. 

4 

2  0 

475 

90 

U.  S.  Grand  C. 


250 


75 


Goods  sold  C.O.D.  for  local  delivery  are  usually  handled 
differently.  At  time  of  sale  a  C.O.D.  invoice  or  a  regular  invoice 
with  C.O.D.  tag  or  ticket  is  made  out,  the  package  is  plainly 
marked  "  C.O.D."  by  the  wrapper  and  sent  to  the  delivery  depart- 
ment. Here  it  is  charged  on  a  C.O.D.  record  sheet  to  the  driver 
getting  it,  who  must  account  for  it  either  with  the  money  col- 
lected or  the  package  returned.  When  the  money  is  turned  over 
to  the  cashier,  the  sale  will  be  recorded  as  a  regular  cash  sale.  It 
will  be  seen  that  in  the  interim  between  sale  and  collection  the 
transaction  is  held  "on  the  memorandum"  by  the  delivery 
department. 

Dishonored  Drafts. — Drafts  are  dishonored  by  non-accept- 
ance. If  the  drawee  refuses  to  accept  a  draft  drawn  on  him,  it  is 
necessary,  in  the  case  of  a  foreign  bill,  to  make  formal  protest  in 
order  to  hold  the  drawer  and  any  indorsers.  Protest  is  not  neces- 
sary in  the  case  of  a  domestic  or  inland  bill.  Since  it  is  not 
necessary,  in  the  case  of  time-after-date  drafts,  to  make  presen- 
tation for  acceptance  until  maturity,  the  draft  may  bear  the  in- 
dorsements of  several  parties  to  whom  it  has  been  transferred. 
To  hold  them,  formal  protest  must  be  made.  The  procedure  of 
protest  for  non-acceptance  is  the  same  as  in  the  case  of  notes, 
discussed  in  Chapter  XXV.  An  accepted  draft  becomes  to  all 
intents  and  purposes  a  promissory  note.     It  constitutes  the 


BILLS  OF  EXCHANGE— DRAFTS  469 

drawee's  promise  to  pay.  The  liability  of  the  drawer  corresponds 
with  that  of  the  first  indorser  of  a  promissory  note.  Regular 
indorsers  on  a  draft  take  rank  after  the  drawer.  Protest  for  non- 
payment of  an  accepted  draft  is,  of  course,  just  as  necessary  as 
for  the  non-payment  of  a  note  and  the  procedure  is  identical. 
The  student  should  distinguish  carefully  between  protest  for  non- 
acceptance  and  protest  for  non-payment.  Collection  drafts  fre- 
quently carry  on  a  perforated  margin  at  one  end  the  words,  "  No 
protest,  tear  this  off  before  presenting."  This  is  an  instruction 
to  the  bank  that  the  expenses  of  protesting  the  draft  are  not  to 
be  incurred  in  the  event  of  the  drawee's  refusal  to  accept.  The 
perforated  slip  should  be  torn  off  before  presentation  to  the 
drawee,  inasmuch  as  it  is  an  instruction  to  the  banker  and  not  to 
the  drawee.    (See  Form  36.) 

Bookkeeping  Entries  for  Draft  Transactions. — Inasmuch  as  a 
merchant  may  be  at  different  times  the  drawer,  drawee,  and  the 
payee  of  drafts,  it  will  be  necessary  to  consider  the  entries  to  be 
made  under  these  different  heads.  The  following  draft  will  be 
used  for  illustration : 


No.  27  Syracuse,  New  York,  July  5,  IQ  21 

At  sight-^^^^^^^ ~>.^-~v^~v — v^^v^Pay  to  the  order  of 

James  Rogers  and  Company  ■^■~v~-^^- ^-~      ~^-^^~^^^^^~-^^    $500 


Fite  hundred . ^^^^^^^v^^.  Dollars 


Value  received  and  charge  to  account  of 
TV)         Rodney  MacDougal 


New  York,  New  York- 


John  Squires 


i.  On  the  Books  of  the  Drawer.— The  drawer's  entries  will 
be  considered  under  two  cases:  (1)  when  the  draft  is  drawn,  (2) 
when  the  draft  is  protested  for  non-acceptance. 


47°  FUNDAMENTALS  OF  ACCOUNTING 

Case  i.  (a)  When  Drawer  and  Payee  Are  Different  Parties. 
When  the  draft  is  drawn,  the  payee  being  a  third  party,  James 
Rogers  and  Company,  the  drawer,  John  Squires,  will  debit  the 
payee,  James  Rogers  and  Company  to  show  the  settlement  of 
his  debt  to  them,  and  credit  the  drawee,  Rodney  MacDougal, 
to  show  that  MacDougal  settled  the  debt  he  owed  to  Squires. 
Analyzed  in  basic  terms,  the  transaction  results  in  the  decrease  of 
the  liability  of  Accounts  Payable  owed  to  Rogers  and  Company, 
and  the  decrease  of  Accounts  Receivable,  consisting  of  Squires' 
account  against  Rodney  MacDougal.     The  entry  would  be: 

James  Rogers  and  Company  (Payee) $500  - 

Rodney  MacDougal  (Drawee) $500  - 

Gave  James  Rogers  and  Company  our  sight  draft  on 

Rodney  MacDougal  to  apply  on  account. 

Case  1.  (b)  When  Drawer  and  Payee  Are  the  Same  Party. 
In  case  the  drawer  and  the  payee  are  the  same  party,  the  draft 
reading  "Pay  to  the  order  of  ourselves,"  and  being  used  for  col- 
lection purposes,  no  entry  will  ordinarily  be  made  by  the  drawer 
until  he  has  received  notice  that  the  draft  has  been  collected, 
when  the  following  entry  will  be  made : 

Cash $499.50 

Collection  and  Exchange .50 

Rodney  MacDougal  (Drawee) $500  - 

We  have  assumed  that  the  bank's  charges  for  collection  were 
50  cents. 

Case  2.  When  the  Draft  Is  Protested  for  N on- Acceptance. 
When  the  draft  is  protested  for  non-acceptance,  the  drawer 
will  be  restored  to  the  same  relation  with  the  other  parties  which 
he  held  before  drawing  the  draft.  The  original  entry  must  now 
be  reversed,  as  follows: 

Rodney  MacDougal  (Drawee) $500  - 

James  Rogers  and  Company  (Payee) $500  - 


BILLS  OF  EXCHANGE— DRAFTS  47 1 

Inasmuch  as  the  draft  was  presented  for  acceptance  by  James 
Rogers  and  Company,  they  had  to  stand  the  expense  of  protesting. 
They  will  charge  this  against  John  Squires,  the  drawer  of  the 
draft,  who  will  accordingly  make  an  entry  as  follows: 

Expense  (or  Protest  Fees) $2.50 

James  Rogers  and  Company  (or  Cash) $2.50 

If  he  reimburses  Rogers  and  Company  immediately  for  the 
expense  of  protesting,  the  credit  item  in  the  above  entry  will  be 
to  Cash  instead  of  to  James  Rogers  and  Company.  If  the  draft 
was  for  collection  and  the  payee  and  drawer  were  the  same  per- 
son, no  entry  will  be  necessary  if  the  draft  is  protested,  since  no 
entry  was  made  at  the  time  it  was  drawn.  Payment  of  the  draft 
by  the  drawee  at  maturity  does  not  affect  the  drawer,  and  so  no 
record  is  necessary.  If,  however,  the  accepted  draft  is  protested 
for  non-payment  at  maturity,  the  entries  for  such  a  transaction 
are  the  same  as  for  the  protested  promissory  note  explained  in 
Chapter  XXV.     In  this  case  the  entry  would  be: 

Rodney  MacDougal $502.50 

Cash $502-5° 

2.  On  the  Book  of  the  Payee. — The  transaction  is  now  being 
recorded  from  the  standpoint  of  James  Rogers  and  Company,  the 
payee. 

Case  1.  When  the  Draft  Is  Received.  When  the  draft  is  re- 
ceived by  the  payee,  James  Rogers  and  Company,  the  following 
entry  may  be  made  for  a  sight  draft: 

Cash $500  - 

John  Squires  (Drawer) $500  - 

This  entry  records  an  increase  in  the  asset,  Cash,  and  a  de- 
crease in  the  asset,  Accounts  Receivable,  in  the  form  of  the, 
reduction  of  Rogers  and  Company's  account  against  John 
Squires. 


472  FUNDAMENTALS  OF  ACCOUNTING 

When  a  time  draft  is  received  the  following  entry  is  made: 

Notes  Receivable $500  - 

John  Squires  (Drawer) $500  - 

This  has  the  effect  of  increasing  the  asset,  Notes  Receivable, 
consisting  of  the  drawee's  written  promise  to  pay  after  accept- 
ance, and  a  decrease  in  the  asset,  Accounts  Receivable,  account 
against  John  Squires. 

Since  this  is  a  sight  draft  the  payee  may  wait  until  the  draft 
has  been  collected,  or  make  the  entry  as  soon  as  the  draft  is 
received.  Sometimes  this  entry  is  deferred  until  the  draft  has 
been  presented  to  the  drawee  for  acceptance.  Theoretically 
this  latter  method  is  better,  inasmuch  as  drafts  prior  to  accept- 
ance are  not  promises  to  pay,  that  is,  notes  receivable.  Prac- 
tically, however',  the  entry  as  given  keeps  track  of  the  draft. 

Case  2.  When  the  Draft  Is  Paid.  When  the  draft  is  paid  at 
maturity,  the  following  entry  will  be  made: 

Cash $500  - 

Notes  Receivable $500  - 

3.  If  the  Draft  Is  Dishonored.  If  the  draft  is  dishonored  for 
non-acceptance  or  non-payment  and  the  entry  indicated  under 
case  (1)  has  been  made  previous  to  dishonoring,  the  reversing 
entry  will  be: 

John  Squires  (Drawer) $500  - 

Cash $500  - 

or 

John  Squires  (Drawer) $500  - 

Notes  Receivable $500  - 

An  additional  entry  will  be  made  to  record  the  payment  of 
protest  fees  incident  to  the  dishonored  draft : 

John  Squires  (Drawer) $2.50 

Cash $2.50 


BILLS  OF  EXCHAIVGE— DRAFTS  473 

Assume  that  the  cost  of  protest  is  $2.50.  N.ote  that  this  is 
charged  to  Squires,  as  it  is  an  expense  which  he,  and  not  James 
Rogers  and  Company,  should  bear. 

3.  On  the  Books  of  the  Drawee.— Let  us  now  consider  the 
transaction  from  the  standpoint  of  the  drawee,  Rodney 
MacDougal. 

Case  1.  (a)  When  Draft  Is  Paid  Prior  to  Acceptance.  If  a 
sight  draft  is  presented  or  if  a  time  draft  is  not  presented  for 
acceptance  until  its  date  of  maturity,  the  following  entry  will  be 
made  by  the  drawee  if  he  honors  the  draft : 

John  Squires  (Drawer) $5oo  - 

Cash $soo  _ 

The  debit  to  John  Squires  (Drawer)  indicates  a  decrease  in  the 
liability  of  Accounts  Payable  of  $500  represented  by  the  amount 
owed  to  Squires  on  account,  and  the  credit  to  Cash  indicates  a 
decrease  in  the  asset,  Cash,  of  $500. 

Case  1.  (b)  When  Draft  Is  Accepted.  If  the  above  draft  is  a 
time  draft  and  it  is  presented  to  the  drawee,  MacDougal,  for 
acceptance  and  he  accepts  it,  the  following  entry  will  be  made  on 
his  books : 

John  Squires  (Drawer) $500  - 

Notes  Payable $500  - 

The  debit  to  Squires  records  the  decrease  in  the  liability  of 
Accounts  Payable,  account  owed  to  John  Squires,  previously  set 
up  at  the  time  purchase  was  made  from  Squires.  The  credit  to 
Notes  Payable  indicates  an  increase  in  the  liability  of  written 
promises  to  pay  money  to  take  the  place  of  the  former  liability 
under  the  open  account  with  Squires.  If  for  any  reason  Mac- 
Dougal refuses  to  accept  the  draft,  he  makes  no  entry  on  his 
books,  since  the  original  record  of  the  transaction  still  holds. 

Case  2.  When  an  Accepted  Draft  Is  Paid.  When  MacDougal 
pays  the  draft  at  maturity  he  will  make  the  following  entry: 


474  FUNDAMENTALS  OF  ACCOUNTING 

Notes  Payable $500  - 

Cash $500  - 

This  indicates  a  decrease  in  the  liability  of  Notes  Payable 
and  a  decrease  in  the  asset,  Cash.  It  will  assist  in  the  under- 
standing of  these  entries  always  to  bear  in  mind  the  purchase  or 
the  sales  transaction  which  preceded  the  draft  transaction. 

Summary  of  Entries. — Under  most  conditions  the  entries 
made  by  the  various  parties  to  a  draft  are  as  follows: 

Drawer's: 

Payee $ .  .  .  . 

Drawee $ .  .  .  . 

Payee's: 

Cash  (or  Notes  Receivable) $ .  .  .  . 

Drawer $ .  .  .  . 

Drawee's: 

Drawer $ . .  . . 

Cash  (or  Notes  Payable) $ . .  .  . 

The  Trade  Acceptance. — A  form  of  draft  which  is  coming  into 
frequent  use  is  called  the  trade  acceptance  to  distinguish  it 
from  the  financial  draft,  whose  purpose  is  merely  the  transfer 
of  funds  without  regard  to  their  source  or  to  the  transactions  out 
of  which  the  debtor  and  creditor  relationship  arises.  The  pur- 
pose of  the  trade  acceptance  is  largely  to  do  away  with  the  open 
account.  Thus,  when  a  purchase  and  sale  transaction  takes 
place,  instead  of  setting  up  a  charge  against  the  customer  on  the 
seller's  books,  the  use  of  a  time  draft,  called  in  this  case  a  "  trade 
acceptance,"  will  bring  about  a  charge  to  Notes  Receivable  in- 
stead of  to  the  customer's  account.  There  are  many  disadvan- 
tages in  the  use  of  the  open  account  and  many  abuses  have  crept 
in.     The  method  of  selling  goods  by  extending  credit  on  open 


BILLS  OF  EXCHANGE— DRAFTS  475 

account  is  not  used  to  any  extent  in  any  other  country.  At  the 
time  of  the  sale  the  customer  makes  formal  promise  to  pay  at  a 
definite  future  date,  this  promise  usually  taking  the  form  of  an 
accepted  draft,  payable  at  the  end  of  the  credit  term  allowed. 
Effort  is  being  made  by  bankers,  credit  men,  and  associations  of 
merchants  pjid  manufacturers  to  introduce  this  method  into  our 
country. 

The  Federal  Reserve  Board  has  laid  down  the  following- 
requirements  covering  the  trade  acceptance: 

i.  It  must  have  arisen  out  of  an  actual  commercial  trans- 
action, usually  the  purchase  and  sale  of  commodities. 

2.  It  must  have  been  drawn  under  a  credit  opened  for  the 

purpose  of  conducting  or  settling  accounts  resulting 
from  business  transactions  involving  the  shipment  or 
storage  of  goods. 

3.  At  the  time  of  presentation  to  the  bank  for  discount  or  as 

collateral  for  the  loan  of  money,  it  must  have  a  maturity 
of  not  more  than  3  months  exclusive  of  days  of  grace. 

Forms  of  Trade  Acceptances. — Two  standard  forms  of  trade 
acceptances  are  in  use,  one  approved  by  the  Federal  Reserve 
Board  (Form  38a),  the  other  by  the  American  Acceptance 
Council  (Form  38b). 


TRADE    ACCEPTANCE 


Form  38.     (a)  Trade  Acceptance  Approved  by  Federal  Reserve  Board 


476  FUNDAMENTALS  OF  ACCOUNTING 


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The  trade  acceptance  is  practically  identical  with  the  draft, 
the  chief  difference  being  the  inclusion  of  a  statement  on  its  face 
to  the  effect  that  it  has  arisen  out  of  an  ordinary  commercial 
transaction,  usually  the  purchase  of  goods.  It  is  drawn  at  the 
time  goods  are  sold  and  takes  the  place  of  an  open  account  with 
the  customer.  The  ordinary  draft  is  drawn  at  any  time  and  has 
no  necessary  relationship  to  a  purchase  of  goods,  although  the 
debtor  and  creditor  relations  between  the  parties  may  originally 
have  arisen  out  of  a  purchase  and  sale  of  goods.  In  the  case  of 
the  trade  acceptance  the  drawer  is  also  the  payee,  since  he  has 
sold  goods  and  in  drawing  the  draft  makes  the  order  for  payment 
to  himself.     The  drawee  is  then  the  customer. 

Definition  of  the  Trade  Acceptance. — The  Federal  Reserve 
Board  defines  a  trade  acceptance  as  "  a  bill  of  exchange  drawn  by 
the  seller  on  the  purchaser  of  the  goods  sold  and  accepted  by 
such  purchaser." 

Disadvantages  of  the  Open  Account. — Experience  of  mer- 
chants with  the  open  account  shows  that  in  the  majority  of  cases 
the  customer  does  not  strictly  regard  the  terms  of  sale  given  him 
at  the  time  of  his  purchase.  Thus,  if  a  sale  has  been  made  on  the 
basis  of  2/10,  n/30,  merchants  report  that  the  2%  is  taken  on  the 
basis  of  anywhere  from  10  to  15  days'  time,  and  that  the  extreme 


BILLS  OF  EXCHANGE— DRAFTS  477 

credit  of  30  days  granted  is  extended  to  anywhere  from  40  to  45 
days  before  payment  is  made.  Little  or  no  compulsion  can  be 
brought  to  bear  on  the  customer.  If  suit  is  ultimately  brought 
to  recover  for  the  goods  sold,  the  merchant  must  prove  delivery 
of  the  goods,  terms  of  sale,  and  the  quality  and  quantity  of  the 
goods  delivered.  All  of  these  items  are  open  to  dispute  by  the 
customer.     Legal  recourse  is  costly  and  time-consuming. 

Open  accounts  cannot  ordinarily  be  used  as  the  basis  for 
credit.  If  a  merchant  has  a  large  amount  outstanding  with  cus- 
tomers, he  cannot  take  these  open  accounts  to  his  banker  and 
discount  them  so  as  to  receive  working  funds  for  carrying  on  his 
business.  There  is  a  group  of  illegitimate  bankers  who  discount 
open  accounts,  but  the  practice  is  frowned  upon  by  legitimate 
bankers  and  is  considered  by  them  as  evidence  of  the  borrower's 
financial  weakness  and  therefore  impairs  his  standing  in  legitimate 
financial  circles. 

Advantages  of  the  Trade  Acceptance. — 

j.  To  the  Seller.  The  seller  of  goods  whose  claims  against  his 
customers  are  in  the  form  of  accepted  drafts  instead  of  open 
accounts  can  take  them  to  a  legitimate  banker,  discount  them, 
and  receive  funds  for  them.  The  banker  is  willing  to  do  this  be- 
cause the  trade  acceptance  indicates  on  its  face  that  it  has  arisen 
from  a  bona  fide  sale  and  should,  therefore,  be  paid  in  accordance 
with  its  terms..  The  banker  has  a  primary  claim  against  the 
customer  and  a  guaranty  of  that  claim  by  the  merchant.  This  is 
called  ''two-name"  paper  as  distinguished  from  the  promissory 
note  which  is  usually  "one-name"  paper.  The  seller  can  thus 
be  furnished  with  funds  to  carry  on  his  business  and  is  able  to  do 
a  larger  volume  of  business  than  if  he  were  wholly  dependent 
upon  his  own  capital.  The  trade  acceptance  being  a  negotiable 
instrument,  in  case  suit  has  to  be  brought  on  it  the  burden  of 
proving  the  circumstances  of  the  transaction  is  not  placed  on  the 
merchant  but  on  the  customer',  who  must  show  that  the  sales 
contract  was  not  lived  up  to  by  the  merchant.     The  trade  ac- 


478  FUNDAMENTALS  OF  ACCOUNTING 

ceptance  having  been  transferred  to  the  banker,  the  customer 
must  pay  it  in  accordance  with  its  terms.  Any  claims  on  account 
of  unsatisfactory  goods  or  for  other  causes  must  be  made  to  the 
merchant,  thereby  checking  the  return  goods  evil  and  the  taking 
of  discounts  after  the  agreed  time  limit.  Stated  briefly,  the  use 
of  trade  acceptances  insures  to  the  seller  a  much  stricter  and  more 
careful  observance  of  the  terms  of  sale  by  the  customer. 

2.  To  the  Buyer.  Under  the  method  of  open  account  selling 
the  merchant  has  to  set  a  higher  sale  price  in  order  to  recompense 
himself  for  loss  from  bad  debts  and  for  the  time  his  money  is  tied 
up  in  credits  granted  to  customers.  The  buyer  who  will  agree 
to  observe  strictly  his  contract  and  make  payment  as  agreed 
becomes  in  a  very  real  sense  a  preferred  buyer,  to  whom  lower 
prices  can  be  made.  While  retail  merchants  are  customers  of 
wholesalers,  they  are  also  sellers.  What  is  an  advantage  to  the 
wholesaler  as  a  seller  will  be  a  similar  advantage  to  the  buying 
retailer  when  he  in  turn  becomes  a  seller.  The  buyer  will  thus 
become  more  careful  in  his  buying  and  will  in  turn  be  more 
careful  of  the  credit  risks  he  takes  as  a  seller. 

Bookkeeping  Entries  for  the  Trade  Acceptance.— Since  trade 
acceptances  are  drafts  or  bills  of  exchange,  the  entries  for  them 
are  the  same  as  explained  above  for  the  draft  under  the  heads, 
"Drawer's  and  Drawee's  Entries."  Since  the  payee  in  the  case 
of  a  trade  acceptance  is  always  the  drawer,  it  is  not  necessary  to 
consider  the  bookkeeping  record  from  his  standpoint.  Trade 
acceptances  may  be  handled  through  the  Notes  Receivable  ac- 
count for  the  drawer  and  the  Notes  Payable  account  for  the 
drawee.  If,  however,  there  are  many  such  items  and  it  is 
advisable  to  collect  the  information  as  to  the  different  kinds  of 
drafts,  Trade  Acceptances  Receivable  and  Trade  Acceptances 
Payable  accounts  may  be  set  up.  From  the  standpoint  of  their 
appearance  on  the  balance  sheet  it  makes  a  more  favorable 
impression  to  classify  drafts  arising  out  of  purchase  and  sale 
transactions  separately  from  other  drafts. 


BILLS  OF  EXCHANGE— DRAFTS 


479 


Other  Types  of  Drafts.— Several  other  types  of  drafts  should 
be  mentioned. 


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480  FUNDAMENTALS  OF  ACCOUNTING 

i.  Bank  Draft.  The  bank  draft  (Form  39)  is  nothing  more 
than  a  bank's  check  drawn  on  a  deposit  kept  with  another 
banker,  usually  in  another  place. 

2.  Post-Office  and  Express  Money-Orders.  The  post-office 
money-order  (Form  40)  is  a  draft  drawn  by  one  postmaster  on 
another  and  made  payable  to  the  party  named.  It  permits  the 
transfer  of  funds  through  the  postal  system  of  the  country.  The 
express  money-order  (Form  41)  is  a  similar  draft  by  one  agent 
of  the  express  company  on  another  agent. 

Questions 

1.  In  what  countries  were  drafts  or  bills  of  exchange  used  before 
England  made  use  of  them? 

2.  In  what  way  did  the  conditions  of  travel,  immediately  following 
the  "dark  ages,"  stimulate  the  use  of  the  draft  or  bill  of  exchange? 

3.  In  what  way  is  the  Law  Merchant  connected  with  the  draft? 

4.  What  is  the  primary  purpose  of  a  draft? 

5.  What  was  the  form  of  the  early  draft  or  request? 

6.  Name  three  classifications  of  drafts. 

7.  Which  developed  first,  the  foreign  or  the  domestic  drafts?     Why? 

8.  Give  an  illustration  of  a  foreign  draft.     Domestic. 

9.  Distinguish  between  time  and  sight  drafts. 

10.  Give  two  divisions  of  time  drafts. 

11.  Differentiate  between  bank  drafts  and  commercial  drafts. 

12.  (a)  Name  the  parties  to  a  commercial  draft, 
(b)  What  are  the  relations  of  the  parties? 

13.  To  be  negotiable,  what  must  a  draft  contain? 

14.  Describe  the  standard  form  of  a  draft. 

15.  (a)  Give  an  illustration  of  a  sight  draft. 

(b)  A  time  draft  after  sight. 

(c)  A  time  draft  after  date. 

16.  (a)  Compare  a  commercial  draft  with  a  check, 
(b)  With  a  promissory  note. 

17.  Give  the  Negotiable  Instruments  Law  definition  of  a  draft  or  bill  of 
exchange. 

18.  (a)  What  is  meant  by  "accepting  a  draft"? 

(b)  What  is  the  form  of  the  acceptance? 

(c)  Which  party  accepts  the  draft? 

(d)  Where  is  the  acceptance  placed  on  a  draft? 


BILLS  OF  EXCHANGE— DRAFTS  48 1 

19.  (a)  May  the  party  on  whom  a  draft  is  drawn  refuse  to  accept  it? 
Why? 

(b)  How  much  time  is  given  in  which  to  decide? 

20.  If  the  drawee  destroys  or  refuses  to  return  a  draft  presented  for 
acceptance,  how  will  it  affect  his  position? 

SI.  (a)  What  is  a  general  acceptance? 
(b)  Qualified  acceptance? 

22.  How  is  the  date  of  maturity  of  each  of  the  following  drafts  found: 

(a)  Sight  draft? 

(b)  Time-after-sight? 

(c)  Time-after-date? 

23.  (a)  What  is  a  collection  draft. 

(b)  How  does  it  differ  from  a  three-party  draft? 

(c)  Will  banks  accept  them  as  deposits?    Why? 

24.  Distinguish  between  an  order  and  a  straight  bill  of  lading. 

25.  Explain  fully  the  three  methods  of  making  C.  O.  D.  collections. 

26.  What  accounting  record  is  made  of  C.  O.  D.  transactions: 

(a)  In  the  case  of  the  three  methods  explained  in  Question  25? 

(b)  In  the  case  of  local  delivery? 

27.  (a)   What  is  meant  by  "dishonored  by  non-acceptance"? 

(b)  What  kind  of  drafts  must  be  protested  for  non-acceptance? 

28.  (a)  With  which  indorser  on  a  promissory  note  does  the  drawer's 
liability  correspond? 

(b)  Can  the  indorsers  on  a  draft  be  held?    How? 

29.  (a)  Distinguish  between  protest  for  non-acceptance  and  protest 
for  non-payment. 

(b)  Explain  "No  protest,  tear  this  off  before  presenting"  printed 
on  the  end  of  a  draft. 

30.  (a)  What  is  the  drawer's  entry  at  the  time  a  sight  draft  is  drawn, 
when  the  payee  is  a  third  party? 

(b)  Would  your  answer  be  the  same  if  it  were  a  time  draft? 
Explain. 

31.  (a)  What  entry  should  the  drawer  of  a  collection  draft  make? 

(b)  Should  the  entry  be  made  at  the  time  the  draft  is  drawn  or 
when  it  is  paid?    Why? 

32.  What  are  the  drawer's  entries  in  case  the  draft  is  protested  for  non- 
acceptance? 

33.  If  the  draft  is  protested  for  non-payment  at  maturity,  what  entry 
should  the  drawer  make? 

34.  What  is  the  payee's  entry  for  a  sight  draft?    Time  draft? 


482  FUNDAMENTALS  OF  ACCOUNTING 

35.  Are  the  payee's  entries  made  at  the  time  he  receives  the  draft  or 
when  the  draft  is  paid?     Explain. 

36.  If  the  draft  is  protested  for  non-acceptance  or  non-payment,  what 
are  the  payee's  entries? 

37.  What  is  the  drawee's  entry — 

(a)  At  the  time  he  honors  a  sight  draft? 

(b)  At  the  time  he  accepts  a  time  draft? 

38.  Give  the  drawee's  entry  at  the  time  he  pays  his  acceptance. 

39.  What  is  the  purpose  of  the  trade  acceptance? 

40.  State  the  Federal  Reserve  Board's  requirements  in  regard  to  trade 
acceptances. 

41.  Describe  the  form  of  the  trade  acceptance  approved  by — 

(a)  The  Federal  Reserve  Board. 

(b)  The  American  Acceptance  Council. 

42.  Compare  the  trade  acceptance  and  the  commercial  draft. 

43.  Give  the  definition  of  the  trade  acceptance. 

44.  Enumerate  as  many  as  you  can  of  the  disadvantages  of  the  open 
account. 

45.  State  the  advantages  of  the  trade  acceptance — 

(a)  To  the  seller. 

(b)  To  the  buyer. 

46.  Under  what  titles  may  the  trade  acceptance  be  recorded  on  the 
books  of — 

(a)  The  seller  of  the  goods? 

(b)  The  buyer  of  the  goods? 

47.  Name  some  other  types  of  drafts. 

48.  What  is  the  purpose  of  a  bank  draft? 

49.  Give  the  form  of  a  bank  draft. 

50.  What  is  meant  by  "New  York  exchange"?     Explain. 

51.  In  the  case  of  a  bank  draft  does  the  drawer  assign  his  funds  in  the 
hands  of  the  drawee?     Explain. 

52.  Must  the  drawee  of  a  bank  draft  honor  it?     Explain. 

53.  (a)  What  is  a  post-office  money-order? 

(b)  Compare  with  a  bank  draft. 

(c)  Under  what  conditions  are  they  used? 

54.  (a)  What  is  an  express  money-order? 

(b)  Compare  with  a  post-office  money-order  and  bank  draft. 

(c)  Under  what  conditions  would  the  express  money-order  be  more 
desirable  than  the  drafts  named  in  (b)? 


BILLS  OF  EXCHANGE— DRAFTS  483 

55.  (a)  Can  money  be  transferred  by  telegraph? 

(b)  Telephone? 

(c)  Registered  mail? 

(d)  Express? 

56.  Explain  the  conditions  under  which  each  of  the  methods  of  trans- 
mitting money  named  in  Question  55  would  be  used. 

Problems 

1.  Manton  and  Company  drew  at  sight  on  C.  H.  Thomas,  Lansing, 
Mich.,  for  $476.40  on  June  4,  19 — ,  in  favor  of  Clark,  Jewell  and  Company, 
and  remitted  the  draft  to  them  in  full  of  account.  Thomas  paid  the  draft 
June  17,  19 — . 

(a)  Write  the  draft. 

(b)  Give  the  drawer's  entry. 

(c)  Give  the  payee's  entry. 

(d)  Give  the  drawee's  entry. 

2.  Rice  and  Dixon,  Omaha,  Neb.,  owe  you  on  account.  In  settle- 
ment they  send  you  a  10-day  sight  draft  for  $1,500,  dated  August  5,  19 — , 
drawn  on  H.  F.  Osborn,  25  State  St.,  Chicago,  111.  Osborn  accepted  the 
draft  August  8,  payable  at  the  Dearborn  National  Bank. 

(a)  Write  the  draft  with  the  acceptance. 

(b)  State  the  position  occupied  by  each  party  to  the  draft.   Give  reasons. 

(c)  Give  Rice  and  Dixon's  entry. 

(d)  Give  your  entry. 

(e)  Give  H.  F.  Osborn's  entry  on  August  8. 

3.  David  E.  Weller,  464  Woodward  Ave.,  Detroit,  Mich.,  agreed  to 
honor  your  sight  draft  of  May  26,  for  $625.40,  drawn  in  favor  of  yourself. 
Weller  paid  the  draft  May  31. 

(a)  Write  the  draft. 

(b)  Give  your  entry. 

(c)  When  will  your  entry  be  made?    Explain. 

(d)  Give  Weller's  entry.     When  will  it  be  made? 

4.  On  June  21,  you  drew  a  60-day  draft  for  $750  on  Luther  Randall, 
176  High  St.,  Columbus,  Ohio,  for  collection  of  his  account.  He  accepted 
the  draft  June  26  and  returned  it  to  you. 

(a)  Write  the  draft  including  acceptance. 

(b)  Give  your  entry.     When  will  it  be  made? 

(c)  When  will  the  draft  be  due? 

(d)  Give  Randall's  entry  at  the  date  of  acceptance. 


484  FUNDAMENTALS  OF  ACCOUNTING 

5.  July  31  you  discounted  the  above  described  draft  at  the  Western 
National  Bank. 

(a)  What  indorsement  would  you  place  on  the  draft? 

(b)  Give  your  entry  at  the  date  of  discount. 

(c)  Give  the  bank's  entry  at  the  date  of  discount. 

(d)  Will  you  make  an  entry  when  Randall  pays  his  acceptance  at  ma- 
turity?   Why? 

6.  Your  sight  draft  for  $250  on  Watkins  and  Company,  317  Seneca 
St.,  Buffalo,  N.  Y.,  drawn  for  collection  through  the  Union  State  Bank 
on  May  16,  was  honored  May  20. 

(a)  Write  the  draft. 

(b)  Give  your  entry.     On  what  date  will  it  be  made? 

(c)  Give  Watkins  and  Company's  entry. 

7.  Floyd  C.  Brewer,  Jackson,  Miss.,  telegraphed  an  order  for  mer- 
chandise to  be  shipped  immediately  with  instructions  that  a  sight  draft 
with  bill  of  lading  attached  be  sent  to  the  Planters  Bank  of  Jackson.  You 
filled  the  order,  which  amounted  to  $876.45,  and  sent  the  draft  as  re- 
quested. 

(a)  Explain  the  procedure  in  this  transaction  from  the  time  the  order 
is  filled  until  the  draft  is  paid. 

(b)  If  Brewer  failed  to  honor  the  draft,  what  action  would  you  take? 
Explain. 

(c)  Write  the  draft. 

(d)  Give  your  entries. 

(e)  Give  Brewer's  entry. 

8.  Harrison  and  Company  of  Mobile,  Ala.,  sold  $700  worth  of  mer- 
chandise to  William  Raymond  of  Nashville,  Tenn.,  November  5,  19 — , 
terms  90-day  trade  acceptance. 

(a)  Write  the  trade  acceptance  using  the  form  approved  by  the  Federal 
Reserve  Board. 

(b)  Give  Harrison  and  Company's  entry  at  the  time  of  sale. 

(c)  Give  William  Raymond's  entry  at  the  time  he  honored  the  trade 
acceptance. 

(d)  Give  Harrison  and  Company's  entry  when  the  acceptance  was 
paid. 

(e)  Give  Raymond's  entry  when  he  paid  the  acceptance. 

9.  A  trial  balance  contains,  among  others,  the  following  accounts: 

Trade  Acceptances  Receivable $4,700  - 

Trade  Acceptances  Payable $3,800  - 


BILLS  OF  EXCHANGE— DRAFTS  485 

(a)  State  what  each  represents  in  terms  of  the  fundamental  accounting 
equation. 

(b)  How  should  each  item  be  shown  on  the  balance  sheet? 

10.  October  23,  19 — ,  you  sold  to  Robert  Hudson,  Baltimore,  Md.,  bill 
of  merchandise,  terms  60-day  trade  acceptance. 

(a)  Write  the  trade  acceptance  using  the  form  approved  bv  the 
American  Acceptance  Council. 

(b)  Give  your  entry  when  you  received  the  acceptance. 

(c)  Give  Hudson's  entry  when  he  honored  the  acceptance. 

(d)  Give  Hudson's  entry  when  he  paid  his  acceptance. 

(e)  Give  your  entry  on  the  date  you  received  payment  for  the  ac- 
ceptance. 

11.  November  25,  19 — ,  you  bought  of  the  First  National  Bank,  H.  B. 
Hazen,  Cashier,  by  check,  draft  No.  13764,  on  the  Hudson  National  Bank, 
New  York  City,for  $1,247. 50,  and  sent  it to  Gibbs  and  Lewis,  Providence, 
R.  I. ,  to  close  your  account.     Exchange  on  the  draft  $1.25. 

(a)  Write  the  check  you  drew  on  the  First  National  Bank  to  pay  for 
the  draft  and  exchange. 

(b)  Write  the  New  York  draft. 

(c)  Should  this  draft  be  indorsed?    Why? 

(d)  Give  your  entry. 

12.  (a)  Write  a  bank  draft  for  $500.  Chicago  exchange.  Supply  the 
other  necessary  data. 

(b)  Write  the  indorsement  to  transfer  it  to  George  H.  Canfield. 

(c)  Write  the  check  to  pay  for  the  draft,  exchange  50  cents. 

(d)  Give  the  sender's  entry. 

(e)  Give  Canfield's  entry. 

13.  You  receive  in  the  morning's  mail: 

Collection  draft,  30-day  sigh\,  drawn  on  H.  S.  Harris,  Omaha, 

Neb.,  for  $300  and  accepted  by  him,  January  10,  19—. 
30-day  trade  acceptance  accepted  by  Earl  Benson,  January  9, 

19 — ,  for  $125.30  payable  at  the  Huron  National  Bank,  Saginaw, 

Mich. 
A  bank  draft  for  $250,  Detroit  exchange,  from  Arthur  Higgins  to 

apply  on  account. 
Post-office  money-order  for  $79.5 7  from  H.  D.  Hubbard  in  payment 

for  an  order  of  merchandise  inclosed  with  it. 
J.  M.  Herbert's  60-day  note  for  $316.90  in  settlement  of  his  account. 
Give  your  entry  for  each  item. 


486  FUNDAMENTALS  OF  ACCOUNTING 

14.  A  series  of  transactions  to  be  recorded  in  the  bound  blank  books 
provided — a  continuation  of  Problem  15,  Chapter  XXVI. 

This  concludes  Mr.  Thatcher's  business  transactions  for  the  quarter 
ending  March  31,  19—. 

Record  the  following  transactions  in  the  books  of  original  entry: 

March,  19 — 

1.  Sold  to  Roy  A.  Parks  merchandise  $4,736.85,  terms  30-day  trade 
acceptance  dated  today.  (Since  you  will  receive  the  accept- 
ance later,  this  transaction  should  be  entered  in  the  sales 
journal  and  charged  to  the  customer's  account.)  Paid  the 
Wright  Construction  Company  by  check  for  enlarging  the 
store  building,  as  per  contract,  $2,500,  and  for  repairing  floors 
in  the  old  part  of  the  building  $117. 

3.  Gave  H.  M.  Scott  Company  check  in  payment  of  our  60-day 

interest-bearing  note  of  1/2/ — . 

4.  Drew  at  30  days'  sight  on  Amos  K.  McBride,  Pittsburgh,  Pa., 

for  $500  in  favor  of  Herbert  Murray,  Nashville,  Tenn.,  and 
remitted  the  draft  to  Murray  to  apply  on  account.  Received 
from  Roy  A.  Parks  30-day  trade  acceptance  properly  accepted, 
payable  at  the  Western  Trust  Company,  Omaha,  Neb.,  dated 
March  1,  19 — ,  for  sale  of  that  date  $4,736.85. 

5.  Received  from  Chester  Pierce,  St.  Paul,  Minn.,  merchandise 

shipped  and  invoiced  on  the  istat$4,573.75,  terms  30-day  trade 
acceptance.  We  accept  the  trade  acceptance  making  it  pay- 
able at  the  First  National  Bank. 

6.  Gave  the  First  National  Bank  our  check  for  $2,000  in  full  pay- 

ment of  our  60-day  note  of  1/5/ — . 
8.  Accepted,  payable  at  the  First  National  Bank,  20-day  sight  draft 
for  $350  dated  March  6,  19 — ,  drawn  by  Herbert  Murray, 
Nashville,  Tenn.,  in  favor  of  Henry  Townsend.  Received 
check  for  $132  from  Amcfe  K.  McBride,  in  full  of  account. 
Sold  to  Roy  A.  Parks,  2/30,  n/60,  merchandise  $2,765.45. 
Sold  merchandise  to  sundry  customers  for  cash  $12,632.62. 

10.  Donated  cash  to  the  Y.  M.  C.  A.  $10,  and  to  the  K.  of  C.  $10. 

Mrs.  Thatcher's  dressmaker  presented  an  order  for  $78.50  for 
personal  services  rendered  to  Mrs.  Thatcher.  We  paid  this 
order  in  cash.  Gave  H.  M.  Scott  and  Company,  Denver, 
Colo.,  check  for  invoice  #6,  less  discount. 

11.  Our  bank  notified  us  that  Amos  K.  McBride's  check  of  March  7, 

drawn  on  the  Bank  of  Pittsburgh  for  $132  had  been  returned 
marked  "No  Funds,"  and  that  the  check  had  been  charged 


BILLS  OF  EXCHANGE— DRAFTS  487 

to  our  account.  (To  correct  your  cash  book  and  show  that  you 
have  a  claim  of  this  amount  against  McBride  charge  him  for  the 
check.) 

13.  Paid  in  cash:  office  salaries  $3 50;  salesmen's  salaries  $300.     Amos 

K.  McBride  informs  us  that  he  is  financially  embarrassed  at 
the  present  time  but  will  make  payment  in  the  early  part  of 
next  month.  We  inform  him  that  we  shall  be  glad  to  extend 
the  time. 

14.  H.  M.  Scott  and  Company  notified  us  that  they  had  allowed 

$17.70  on  our  disputed  claim  of  $40  for  damaged  goods  on 
invoice  of  $1,217.70,  dated  December  31,  19 — .  We  accepted 
the  allowance  and  sent  them  check  for  $1,200  in  full  settlement 
of  that  invoice. 

15.  Gave  Herbert  Murray  check  in  payment  of  our  60-day  note  of 

1/ 14/— ,$1,500. 
17.     Received  merchandise  ordered  from  sundry  creditors  on  the  13th 
and  sent  them  30-day  trade  acceptances  duly  accepted  by  us 
covering  all  purchases  $9,781.55. 

19.  Paid  cash  for  general  expenses  $48.70.     Received  check  from 

Homer  Welbrun  for  sale  #7,  less  2%. 

20.  Sold  merchandise  to  sundry,  customers,  terms  30-day  trade  ac- 

ceptance $7,844.25. 

24.  Received  merchandise  from  H.  M.  Scott  and  Company,  invoice 

dated  March  21, 19—,  $3,227.30,  terms  2/30,  n/60.  Received 
merchandise,  invoice  dated  March  22,  $1,770.84,  terms  3/30, 
n/60,  from  Chester  Pierce. 

25.  Gave  the  Ezy  Advertising  Company  check  for  various  circulars 

and  other  advertising  $1 10. 

28.  Our  bank  notified  us  that  it  had  paid  and  charged  to  our  account 
our  20-day  sight  acceptance  of  3/8/—,  $350,  drawn  by  Herbert 
Murray. 

3 1 .  Our  bank  notified  us  that  it  had  placed  to  our  credit  30-day  trade 
acceptance  of  3/1/—,  in  our  favor,  accepted  by  Roy  A.  Parks, 
$4,736.85;  and  that  it  had  paid  and  charged  to  our  account  30- 
day  trade  acceptance,  $4,573-75.  favor  of  Chester  Pierce,  ac- 
cepted by  us  3/1/—.     Paid  telephone  and  telegraph  bills  by 

check  $18.45.    Gave Railroad  check  for  freight  $303.28, 

of  which  $192.75  applies  to  purchases,  and  $110.53  applies  to 
sales. 

(a)  Summarize  the  special  journals  and  balance  the  cash  book. 

(b)  Post  and  prepare  a  trial  balance,  recording  it  on  pages  32  and  34 


488  FUNDAMENTALS  OF  ACCOUNTING 

of  the  journal  blank,  heading  the  seventh  and  eighth  columns,  "  March  3 1 , 
19—." 

(c)  Using  the  additional  information  given  below: 

1.  On  a  sheet  of  journal  paper  prepare  a  balance  sheet  of  March 

31,  19— 

2.  On  a  sheet  of  journal  paper  prepare  a  profit  and  loss  statement 

for  the  3  months  ended  March  31,  19 — . 

Additional  Information  March  31,  19 — : 

Merchandise  inventory $8,791.50 

Taxes  accrued  (estimated) 92.40 

Salesmen's  salaries  accrued 125  - 

Office  salaries  accrued 90  - 

Advertising  deferred  to  the  next  period 78  - 

Material  on  hand: 

General  expense $30  - 

Office  supplies 18- 

Insurance  unexpired 20  - 

William  H.  Powell  owes  rent  for  the  current  month 60  - 

Interest  accrued  on  Liberty  bonds 10  - 

Interest  accrued  on  mortgage  payable 90  - 

Provide  for  depreciation  on  the  balance  in  each  account  as  follows: 

Furniture  and  fixtures,  1%  per  month 
Delivery  equipment,  i>2%  per  month 
Buildings,  y£%  per  month 

Note  that  this  is  a  3  months'  period. 

(d)  Close  the  ledger  by  journal  entries. 

(e)  Prepare  a  post-closing  trial  balance  and  record  it  in  columns  9  and 
10  of  the  trial  balance  section. 


INDEX 


Acceptances, 
drafts,  462 

general  or  unconditional,  463 
qualified,  463 
trade,  474-478 
Account,  148 

balancing  an,  218 
bank,  428 

balancing  of,  436 
overdrawing,  446 
Accounting, 
as  a  career,  5 
cycle,  211 
defined,  12 
period,  211 

place  of,  in  business,  5 
Accounts, 

payable,  32,  48 

expansion  by  substitution,  143 
receivable,  30,  42 

expansion  by  substitution,  142 
Accruals,  228-238 
Adjustment  entries,  212 
Amount, 

of  a  note,  256 
to  be  paid,  on  invoice,  376 
Assets, 
accrued,  234-238 
classification  of,  27-31 
changes  in,  54-65,  69-74 

comparative  statements,  69-74 
equation  method  of  showing,  80- 

88 
expansion   by   substitution,   94- 
100,  107-128,  142-157 
defined,  13,  22 
expense,  29,  45,  61 


Assets — Continued 

interest  paid  in  advance,  245 
statements,  50 
valuation,  39-53 

changes  in,  54-65 
withdrawn,  65 


B 


Balance    sheet,     161- 178     (See    also 

"Statement") 
compared   with   post-closing    trial 

balance,  176 
reconciliation  with  profit  and  loss 

statement,  167 
Balancing  an  account,  2 1 8 
Banks,  423-448 
account, 

balancing,  436 

overdrawing,  446 

reconciliation    with    depositor's 
438 
checks,  431 

cashier's,  444 

certified,  442 

dishonoring,  447 

payment  stopped,  446 

spoiled,  445 
classification  of,  425 
clearing  house,  447 
collections,  445 
commercial,  426 
deposit  ticket,  429 
depositor's  account  with,  436 
deposits,  429 

certificate  of,  444 
draft,  480 
functions  of,  423 
opening  accounts  with,  428 


489 


49o 


INDEX 


Banks — Continued 

pass-book,  430 

record  of  dealings  with,  435 

savings,  428 

statements,  436 
Bill  of  lading,  385 
Bills  of  exchange, 

drafts,  457-480 

money-orders,  480 

trade  acceptances,  474-478 
Bonds  (See ''Securities") 
Business,  classification  of,   1 1 
Business  papers, 

explained,  373 

invoice,  374-378 

purchase  invoice,  378 

purchase  order,  378 

record  of  receipts,  379 

sales  invoice,  383 

sales  orders,  382 

shipments,  385 


Capital, 

changes  in,  54 

accounts  cleared  by  closing  the 

ledger,  168 
equation    method    of    showing, 

80-88 
expansion  by   substitution,   94- 

100,  107-128,  142-157 
summarizing,  122 
decrease  in,  54-128 

sources  of,  60 
defined,  15,  23 
drawing,  145 

equation  for  computing,  23 
increase  in,  54-128 
sources  of,  59 
temporary,  145 
invested, 

method  of  determining,  39-52 
statement  of,  50 
withdrawal  of,  145 
Carry  forward,  cash  book  entries,  344 


Cash,  29,  39 

balances,  342,  349 
book,  341-352 
credits  in,  341 
debits  in,  341 
forwarding,  344 
functions,  344 
proving  totals,  345 
purposes  of,  342 
ruling,  342 

shortage  and  overage,  349 
uses  of,  344 
defined,  321 

disbursements,  defined,  331 
disbursement      journal,      331-338, 
341-352 
posting,  335 

record  of  goods  received,  380 
discount,  275 
purchase  records,  302,  380 
purchases  based  on,  293 
receipts  journal,  321-327,  341-352 
sales  based  on,  308,  375 
Cashier's  check,  bank,  444 
Certified  checks,  442 
Check, 

bank,  426-447 
books,  435 
cashier's,  444 
certified,  442 
dishonoring,  447 
form  of,  432 
indorsement  of,  434 
items  on,  431 
payment  stopped,  446 
spoiled,  445 
Classification,  assets  and  liabilities, 

27-31 
Clearing  house,  bank,  447 
Closing, 
entries,  213 
journal,  213-218 
ledger,   168-178,  21 1-22 1 
C.O.D.  collections,  465 
Collections, 
bank,  445 


INDEX 


491 


Collections — Continued 

C.O.D.  method,  465 

draft,  464 
Comparison, 

of  assets  and  liabilities,  54-65 

of  financial  conditions,  69-74 
Compound  entry,  294 
Corrections,  how  to  make  in  books, 

202 
Cost, 

of  goods  sold,  how  determined,  1 1 7 

of  interest,  244,  257 

price,  62 
Credit, 

cash  book  entries,  341 

defined,  149 

journal  entries,   194 

memorandum,  388 

purchases  based  on,  293 

sales  based  on,  308 

sales  discount,  276 

sales  journal  entries,  309 


Daily    operations,     information    by 

expansion,  94-100 
Dashes,  in  cents  column,  178 
Dates, 

computing  time  between,  249 

of  maturity,  256 

of  transaction,  on  goods  invoice, 
294 
Debit, 

cash  book  entries,  341 

defined,  149 

journal  entries,  194 

sales  journal,  309 
Decrease    in    capital,    54-65,    69-74 
(See  also  "Losses") 

equation  method  to  show,  80-88 

sources  of,  60 
Deeds,  real  estate,  47 
Delivery  equipment,  31,  46 
Deposit  ticket,  bank,  429 
Deposits,  bank,  cheok  book,  435 


Disbursements,     cash     journal,  331- 

338,  341-352 
Discount, 

cash,  275 

defined,  256,  273 

on  notes,  255 

on  profit  and  loss  statement,  281 

on  time  sales,  375 

purchase,  279 

sales,  276 

term  of,  256 

trade,  273 
Dishonoring  notes,  412 
Domestic  drafts,  459 
Drafts,  457-480 

acceptance  of,  462 

bank,  480 

bookkeeping  treatment,  469 
for  drawee,  473 
for  drawer  of,  469 
for  payee,  471 

classification  of,  458 

C.O.D.  collections,  465 

collections  by,  464 

contents  of,  460 

defined,  462 

dishonored,  468 

domestic,  459 

drawee,  460 

drawer,  460 

foreign,  459 

form  of,  461 

maturity  of,  464 

money-orders,  480 

origin  of,  457 

payee,  460 

purpose  of,  457 

sight,  459 

time,  459 

trade  acceptances,  474-478 
Drawee, 

of  a  draft,  460 

bookkeeping  treatment,  473 
Drawer, 

of  a  draft,  459 

bookkeeping  treatment,  469 


492 


INDEX 


E 


Education  for  accountancy,  i 
Endorsements  (See  "  Indorsements  ") 
Equation, 

expanding  horizontally,   146 

for  computing  capital,  23 

for  cost  of  goods  sold,  118 

to  show  changes  in  financial  condi- 
tion, 80-88 
Errors, 

corrections  of,  202 

in  journal  entries,  203 

in  posting,  361 
Expansion,  by  substitution,  94-100, 

107-128,  142-157 
Expense  assets,  29,  45,  61 
Expenses, 

expanding  the  title  in  statements, 
119 

incoming,  62 

non-operating,  63 

operating,  61 

outgoing,  62 

unpaid,  229 
Express  money-order,  480 


Financial  conditions, 

changes  in,  54-128 

comparative  statements,  69-74 
Fiscal  period,  211 
Fixtures      (See       "Furniture      and 

fixtures") 
F.O.B.,  385 
Foreign  drafts,  459 
Furniture  and  fixtures,  30,  45 


General  journal  (See  "  Journal ") 

Going  concern,  39 

Goods, 

invoice,  374 

credit  memorandum,  388 


Goods — Continued 

received,  recording  of,  380 
shipments,  methods  of,  385 

Graphs,   16 

Gross  profit,  62 


Holder,  of  promissory  note,  408 


Income,  interest,  246,  261 
Incoming  expenses,  62 
Increases  in  capital,  54-128   (Seeals: 
"Profit") 

equation  method  to  show,  80-88 

sources  of,  59 

temporary,  145 
Indorsements, 

checks,  434 

forged  or  fraudulent,  434 

promissory  notes,  404 

qualified,  405 

restrictive,  406 

successive,  407 

unqualified,  405 
Interest,  242-267 

accrued,  228 

accurate,  254 

calculation,  248-255 

interchanging  principal  and  time 

254 

sixty-day  method,  250 
time  between  two  dates,  249 

cost,  recording,  257 

defined,  242 

discounting  notes,  255 

expressions  used  in  discount,  256 

income,  246,  261 
recording,  261 

on  money  borrowed,  244 

on  notes,  256 

paid  at  maturity,  245 


INDEX 


493 


Interest — Continued 
paid  in  advance,  245 
rate,  243 
defined,  256 
Inventory, 
merchandise,  107 
valuation,  43 
Investments,  as  an  increase  in  capital, 

60 
Invoice, 
accounts  payable,  48 
articles  on,  376 
goods,  374 

received,  294 
purchase,  378 
sales,  383 

bookkeeping  record  of,  386 
shipment,  378 


Journal,  191-206,  359-365  (See   also 

"Cash  disbursements  journal"; 

"Purchase      journal";      "Sales 

journal") 
aa justing  and  closing  entries,  213 
compound  entry,  294 
contents,  360 
errors  in,  203 

form  and  arrangement,  193 
ledger  closing  by  means  of,  211- 

221 
opening  entries,  362 
post  marking,  202 
posting, 

entries  in  ledger,  199 

errors  in,  361 

time  of,  362 
purchases  recorded,  294 
purpose  of,  191,  359 
reading  of,  198 
records,  192 

split  transactions,  326,  336,  364 
tabulations,  178 
transfer  of  entries  to  close  ledger, 

213 


Ledger,  148-157 

adjustment  of,   167 

cash  account,  when  omitted,  344 

closing,   168-178 

balancing  an  account,  218 
by  means  of  journal,  21 1-22 1 

dashes  in  cents  column,  178 

post-closing  trial  balance,  175 

post  marking,  202 

posting,   199 

posting  the  purchase  journal,  300 

records  in,  191 

ruling,  177 
Liabilities, 

accrued,  229-233 

changes  in,  54-65,  69-74 

comparative  statements,  69-74 
equation  method  of  showing,  8c 

88 
expansion    by    substitution,  94 
100,  107-128,  142-157 

classification  of,  32-33 

denned,  14,  23 

statements,  50 

valuation,  39-53 
Loans, 

bank,  426 

interest  on,  244 

methods  of  obtaining,  248 
Losses,  63 

anticipated,  64 

as  operating  expenses,  63 

net,  122 


M 


Market  value,  as  affecting  assets,  64 
Merchandise,  29,  43 

as  affected  by  market  value,  64 

goods  invoice,  374 

inventory  of  stock,  107 

losses  in,  64 

purchases,  107 

purchases  account,  291-304 


494 


INDEX 


Merchandise — Continued 

sales,   107 

sales  journal,  308-316 

stock-in-trade,  292 
Money, 

borrowed,  cost  of  interest  on,  244 

methods  of  obtaining,  248 

orders,  480 
Monthly      statements,       customers' 

accounts,  389 
Mortgages, 

payable,  32,  49 

valuation,  46 


Open  accounts,  as  a  basis  for  credit, 

477 
Opening  entries,  general  journal,  362 
Operating  expenses,  61 
Orders, 

purchase,  378 

sales,  382 
Outgoing  expenses,  62 
Overages,  cash,  350 
Overdrawing,  bank  account,  446 


N 


Negotiable  instruments,  399-416 
bank  dealings  in,  427 
bills  of  exchange,  457-480 
defined,  400 
drafts,  457-480 
promissory  notes,  401-416 
Net  worth  (See  "Capital") 
Notes, 
payable,  32,  48,  410 
payment     by,     record     of    goods 

received,  381 
promissory,  401-416 

advantages  of,  404 

contract  obligations,  408 

defined,  403 

discounting,  255 

dishonored,  412 

dishonored,  record  of,  415 

essentials  of,  401 

expressions    used    in    discount, 
256 

form  of,  402 

holder  of,  408 

indorsements,  404 

notes  payable,  410 

notes  receivable,  410 

payment  of,  411 

protest,  412 
Notes  receivable,  31,  41,  410 


Pass-book,  bank,  430 
Payee, 

of  a  draft,  460 

bookkeeping  treatment,  471 
Payment, 

of  a  note,  411 

recording  of,   for  goods   received, 
380 

stopped  on  check,  446 
Periods,  accounting  or  fiscal,  211 
Post  marking,  202 
Post-office  money -order,  480 
Posting,  199 

cash  disbursements  journal,  335 

cash  receipts  journal,  325 

errors  in,  361 

general  journal,  361 

purchase  journal,  300 

sales  journal,  312 
Prices, 

cost,  62 

sales,  62 
Principal,  of  a  note,  256 
Proceeds,  of  a  note,  256 
Profit, 

as  an  increase  in  capital,  59 

determining,   114 

gross,  62 

in  total,  in 

net,  122 

operating,  59 


INDEX 


495 


Profit    and    loss    statement,  69-74, 
161-178 
discount  items,  281 
expansion  by  substitution,  94-100, 

107-128 
financial      management      section, 

281 
method  for  closing  ledger,  168 
reconciled     with     balance     sheet, 
167 
Promissory  notes  (See  "Notes") 
Property,   13 

private,  necessary  records  for,  4 
Protest,  promissory  note  dishonored, 

412 
Purchase  journal,  291-304 
advantages  of,  303 
new  form,  301 
old  form,  295 
posting,  300 

record  of  goods  received,  380 
Purchases, 
discount,  279 
invoices  for,  294 
journal  entries,  294 
merchandise,     stock-in-trade,  107, 

293 

order,  378 

transactions,  classed  as,  292 

volume  of  business,  302 


Rate  of  interest,  243 

defined,  256 
Real  estate,  31,  47 

mortgages  on,  32,  49 
Receipts, 

cash  journal,  321-327 

of  goods  bought,  380 
Rent,  accrual  method,  228 
Retail     stores,     sales     orders     and 

invoice,  384 
Rulings, 

cash  book,  342 

ledger,  177* 


Salaries,  accrual  method,  228 
Sales, 

cash  bases,  375 
discount,  276 
invoice,  383 

bookkeeping  record,  386 
in  retail  store,  384 
journal,  308-316 
posting,  312 
sales  invoice,  386 
volume  of  business,  314 
of  merchandise,   107 
order, 

in  retail  store,  384 
routine  of,  382 
price,  62 
terms  of,  375 
payment,  308 
time  bases,  375 
Schedules,   summary   of   assets   and 

liabilities,  50 
Securities,  31,  46 
Selling  assets,  28 
Shipments, 

invoice  for,  378 
methods  of,  385 
Shortages,  cash,  350 
Sight  drafts,  459,  464 
Sixty-day    method,     computing    in- 
terest, 250 
Split  transactions,  326,  336,  364  • 
Statements,  15,  25  (See  also  "Profit 
and  loss  statement") 
assets  and  liabilities,  50 
bank,  436 

reconciliation    with    depositor's 
account,  438 
comparative,  69-74 
customers'  monthly,  389 
daily  operations,  94-100 
preparation  of,  162 
Stock  (See  "Securities") 
Stock-in-trade  (See  "Merchandise") 
Supplies,  not  merchandise  purchases 
293 


496 


INDEX 


Tabulation,  on  journal,  198 
Terms, 

of  discount,  256 

of  sale,  375 
Time  drafts,  459,  464 
Time  sales,  375 
Trade  acceptance,  474-478 
Trade  discount,  273 
Trial  balance,  151-157 

comparison    of    post-closing    with 
balance  ^hcet,  176 

in   preparation   of   balance   sheet, 
163 

post-closing,   175 


Valuation, 

accounts  payable,  48 
accounts  receivable,  42 
assets,  39-53 


Valuation — Continued 

cash,  39 

delivery  equipment,  46 

expenses,  45 

furniture  and  fixtures,  45 

inventory,  43 

liabilities,  39-53 

merchandise,  43 

mortgages,  49 

notes  payable,  48 

notes  receivable,  41 

procedure,  39 

purpose  of,  39 

real  estate,  47 

securities,  46 
Vocations,  choice  of,  2 
Volume  of  business  done, 

with  each  creditor,  302 

with  each  customer,  314 

W 
Wages,  accrual  method,  228 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 

Los  Angeles 
This  book  is  DUE  on  the  last  date  stamped  below. 


FEB  2  3  19741 


Form  L9-32m-8,'58(5876s4)444 


Library 

Graduate  School  of  Business  Administration 

University  of  California 

Los  Angeles  24,  California 


*-NT 


SO'  THERN   BRANCH 

UNIVERSITY  of  CALIFORNIA 
LIBRARY 

LOS  ANGELES.  CALIF. 


